Long New Media Investment Group

The new position I added last week and this is New Media Investment Group (NEWM). New Media is in the business of owning local newspapers and websites, and providing digital marketing services. It was a spin-off from Newcastle Investment Corp in February of 2014.

I like local newspapers as an out of favor industry where things are not as bad as believed. I favor the smaller, more local outfits, which I believe will face less competition from other news sources.

Print advertising is in secular decline, but the rate of decline appears to have stabilized. NEWM’s model is to acquire local papers at between 3-5x EBITDA. Since their spin-off NEWM appears to be executing well on that strategy. You can read more in their most recent presentation.

I liked NEWM here for several reasons. It is back near its spin-off price around $14, down from its all time high around $25, despite improved financials. At my average price of a little under $15, it pays nearly a 9% dividend, which is well covered by free cash flow. The balance sheet is in decent shape. There was insider buying by both the CEO and CFO a couple weeks ago. Leon Cooperman (a respected value investor) is a 10% owner and has also been a buyer the past two weeks. NEWM also has around $200 million in NOLs and owns around $200 million in real estate.

Often very high dividends are a red flag, an indication that the business is in trouble. A double whammy of a reduced/eliminated dividend and stock price depreciation could occur. In the case of NEWM I think the dividend is safe, and even likely to grow.  So I do not see much downside from current prices.

If things work out on the upside, I think the dividend could grow modestly over the next few years and the stock could appreciate to where the dividend yield is around 5-6%, resulting in a total return of around 100%. The worst case scenario I see is skepticism remaining high, causing the stock to continue to trade near its current 8-9% dividend yield. So overall I see the potential for a double with minimal downside, resulting in a favorable risk/reward ratio.

I like NEWM better than its peers (such as GCI, NYT, TPUB, JMG, LEE, etc) because it is among the largest operators of smaller town papers with the least exposure to larger metropolitan/regional papers, and also because of the dividend and insider buying.

While the GM-B warrants I sold had more upside, they also had more downside, and in the current environment I felt trading some upside for less downside was the right move. I also added some more GTIM this week. With these moves I am now at around 10% cash.