[reposted from Buffetology thread] Journal Register (JRC)
[Unlike most of my stock recommendations, this one does not contain a valuation. I've done one, and if anybody is interested we can get into it. The stock is cheap. But I have taken this one from Buffett's perspective. First, what kind of business do I want to own? Then buy it at the right price. JRC is the kind of business I want to own. And I think it is the right price, though I have no doubt it could go lower in a market panic.
And to deflect an obvious cheap shot, where do I get off posting a buy recommendation two weeks after saying I sold half of my portfolio? Good question. As many of you know, my job is with an investment fund. So my sell was half of my personal portfolio, and I stand by that. But my job is to look for ideas every day - professionally I HAVE to be 100% invested in stocks. Personally I have the option of going into cash. This is one I recently bought professionally. If a first time poster played this game, I would be the first to trash him or her for that inconsistency, but I think I've earned a little bit of credibility on this thread over the last couple years. What I am saying here is that if I wanted to invest in this market, this is the kind of thing I would buy. If that logic is too strained, then I should probably keep ideas to myself for a while. I just don't know how something like that reads to you - I recognize the conflict.]
While we're all dreaming about Coke, let's consider another of Warren Buffett's favorite businesses. Newspapers. Go back and read what Buffett has written about the business of newspapers, and consider the compounding he has achieved with one brilliant purchase of Washington Post. The economics of this industry are almost unparalleled. The logic is that a half decent newspaper is a natural monopoly.
Newspaper stocks are out of favor now. (Put that in perspective. In this market the phrase "out of favor stock" may be the world's biggest oxymoron).
I would point you toward a little company in Trenton, NJ called Journal Register (JRC). They are exclusively in the newspaper business. No television stations. And they are in the LOCAL newspaper business. Community newspapers. When I think about where the monopolies are in the newspaper business, I think local.
Think about your local newspaper. It is likely to be a monopoly from two angles. 1) Where else can you get information on your kid's little league team, or your kid's elementery school? If you are part of the community you probably subscribe - what's it cost you? $40 a year? 2) The economics of newspapers is advertising (which is closely tied to the economics of subscriptions). The New York Times competes with television and national magazines. Who does your local newspaper compete with? If I'm the local pizza shop or the local realtor, I have to advertise in the local paper. If they raise the price 5% I still have to advertise in the local paper. If I want to sell my car, I advertise in the local newspaper. These two dynamics combine to equal pricing power which few businesses have.
Newspapers, especially local newspapers, have a couple other characteristics which are very favorable to the investor. There is very little capital expenditure required - cash flow is free cash flow to the shareholder. The product cycle is as long as product cycles get. Has the business changed in the last century? Not much. Will the internet change it? Maybe if a local newspaper is completely blindsided by the internet, but Journal Register is positioned to just transfer its franchise to the internet if that's what the customer wants. And when I look at a business that has the same economics as it did 100 years ago, before television or radio, my hunch is that the internet is not going to change things much either.
Journal Register is a consolidator of local newspapers. They own a bunch of them, concentrated in five regions. In these markets, when they buy a neighboring paper, think of the economics. Fire half the staff - you can do a lot of the advertising sales on a regional basis. Your best state government reporter can run the same story in all your regional papers - if they were run separately they would each need a state government reporter. You can even print the newspaper at another press you own and close down the acquired paper's print shop. You can sell advertising as a regional package. The management of JRC understands this and exploiting these local economies of scale is their mission in life. The only criticism I can make of this management team is that they are too "gung ho" in cutting costs.
JRC trades at about $12 a share. I think it is worth about 20 and that value is growing. What you will see first if you give it a look is oodles of debt and negative book value. But don't pass without first looking at the free cash flow the business generates, and the steadiness of that free cash flow. Leverage, within reason, is not a great concern for this type of business. But the leverage of the business makes it very difficult to say whether it is worth 15 or 20 or 30 a share. I am satisfied that it is worth significantly more than the stock price, and that that value will grow over time.
I have no problem with buying JRC for the long term at the current price. If the market breaks hard, this stock is illiquid and may drop to truly idiotic prices, so it is worth getting to know now so you can scoop it up at 8 in a panic.
If we're going to look for Buffett investments today, remember we're not Buffett. We don't have his mind - but if we truly understand what he has tried to teach us, we can learn from his wisdom. But we also don't have his size. While I'd love to be worth $40 billion, that is not an advantage as an investors. I don't have to invest a billion dollars in every idea to make it worthwhile. Buffett freely admits that size is his biggest problem today - he might agree with me that JRC is a steal at the current price, but it wouldn't matter because the company is too small. What that tells me is forget Coke. Study Buffett economics, and find those economics in a small cap stock that is being thrown in the trash in this large cap obsessed market. That is what led me to JRC.
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