10-10-09 - Severe Undervalution Makes A.H. Belo (AHC) Perfect

click here for the the post on Rodman & Renshaw Capital Group (RODM)

Finally, I've got a new post here at http://theperfectstock.blogspot.com. I haven't written anything in about a month because I couldn't really find a stock that I thought was better than my last pick of Rodman & Renshaw Capital Group (RODM). It has done really well and should continue to move higher because of tremendous earnings expected to be released in the next few weeks. My next selection may be the most undervalued stock in the entire market. These gems typically don't stay undervalued for long. For this choice I'll venture back to the newspaper media sector. It is a group that I have had a lot of success with in the past few months and have continued to follow closely. A.H. Belo Corporation (AHC) is the next perfect stock.

A. H. Belo Corporation owns three daily newspapers and 12 associated websites including The Dallas Morning News, The Providence Journal and The Press-Enterprise. They produce local, state, national and international news. In addition to these three daily newspapers, the company publishes various specialty publications targeting Hispanic and other niche audiences. They also own a direct mail and commercial printing business. On February 8, 2008, the Company was spun off from its parent company, Belo Corp (Belo) and became a separate public company.


After looking at a lot of stocks, I've concluded that AHC may be one of the cheapest stocks on the market. This company's balance sheet is simply phenomenal. One way to gauge if a stock is undervalued is by comparing the book value per share to the current share price. For my readers who don't have a good understanding of a company's book value, it's basically just the shareholder equity (Assets - Liabilities = Shareholder Equity). Another way to look at book value is that it represents a theoretical dollar amount that shareholders would receive if the company was sold or liquidated. AHC's shareholder equity is approximately $300 million. If you consider that AHC has just over 20 million shares outstanding fully diluted, its book value is around $15/share.

Now, let's put this book value figure into perspective. Very few stocks trade at or below book value. This valuation metric typically sets the floor for a stock price under a worse case scenario. As a matter of fact, most stocks trade at hefty multiples to their book value. AHC ended the trading session on 10/9/09 at $3.56/share. Now, compare that to a book value of $15/share. This means the stock is trading at more than 4 times less than its book value. I don't know of any other stock that carries such a valuation discrepancy. Even without great earnings, a shareholder could conservatively discount the book value by 1/3 and feel comfortable knowing that their shares should at least be worth $10/share in a buyout. That amount represents 3 times the current share price.

Also, most newspaper stocks are saddled with mounds of debt due to the economic downturn in the last year. A.H Belo Corp is the exception. They only have $3 million in debt per their last quarterly report, yet they are currently trading at a significant discount to their more notable peers such as The McClatchy Company (MNI) and Lee Enterprises (LEE). I can assure you that this oversight in valuation by the market won't go unnoticed forever.


See below for a 6-month chart of A.H. Belo Corp below:

As you can see, AHC made an monster move back in mid-July by nearly tripling off of its bottom in just 3-weeks. Due to the low share count, AHC was extremely volatile the next two months, but pretty much averaged a little over $3/share. However, notice how in the last month the trading range has tightened significantly (a more technical term would be that the "Bollinger Bands" are tightening). A textbook technical result of this form of consolidation is generally an explosive move higher. Right now, the key resistance level for AHC to break is in the $3.75 to $4.00 price range. The last two hours of the trading day on Friday 10/9/09, the stock spiked to $3.75 before selling off the last hour. I believe with another solid run, AHC will break that level of resistance and run significantly higher. The charts of MNI and LEE are similar in that they too traded in a range for about two months; however, within the last week both have broken their points of resistance and have seen new highs. See the 3-month chart of MNI below for what I feel will be a similar pattern for AHC:

Sector Momentum and News

In my post a few months ago on Lee Enterprises (LEE) . I felt I did a pretty good job of detailing why I thought the newspaper stocks would turnaround (click this link to review that post). So far, I've been fairly accurate in my assessment. To be frank, AHC does not achieve the margins of its larger brethren, but its superior balance sheet more than makes up for this shortfall. As a result, all the newspaper stocks have moved strongly off their lows. One reason the sector has moved higher in recent days is because earning reports in the sector begin next week. Clearly, investors feel confident that the reports will be positive.

A lot of that confidence stems from some news released by Gannett Co. (GCI), the bellwether of the newspaper stocks. I believe that this news marked the beginning of the next leg up in the group. A little over a week ago, GCI pre-announced stronger year-over-year expected income growth and noted significant improvements in their publishing division. It has been widely publicized that media advertising picked up significantly during the 3rd quarter and the industry as a whole has gotten leaner and meaner. Despite less sales than in years past, the newspaper stocks have and will return to profitability. AHC should be no exception.


The newspaper stocks are poise to move higher and many of the companies have already made their move. This sector is notorious for only having one or two names move big at a time. Usually, one or two stocks will move hard one day and then a week or two
later, a different company would jump 40-60%. You could have made a mint day-trading MNI and LEE had you alternated moving the profits from one to the other after a big move in each had been made. AHC hasn't really moved yet, but I strongly believe it's coming soon. I can see A.H. Belo quickly moving to $5-$6. Based on what we know regarding its book value, it definitely has the potential to move much higher longer term. Severe undervaluation, technicals, and strong sector movement make A.H. Belo Corp (AHC) the next perfect stock.