7-25-09 - Hot Sector Makes Lee Enterprises(LEE) Perfect

It now looks like http://theperfectstock.blogspot.com has plenty of quality stocks to choose from. The stock market was hitting on all cylinders last week lead by strong and/or improving earnings in several sectors. Just as I had predicted on one of my other blogs, the DOW blew past 9000. Technology has been one of the leaders in pushing the market higher, but the hottest sector right now is the Newspaper/Media stocks. Several of these companies have more than double in share price over the last week, but I feel that there is still a great opportunity for significantly more gains in select names. The newspaper stock that I feel has the most potential to move higher is Lee Enterprises, Inc. (LEE). It is my selection for the next perfect stock.

Lee Enterprises is a provider of local news, information, and advertising in primarily midsize markets with 49 newspapers and a joint interest in 5 others, growing online sites and more than 300 weekly newspapers and specialty publications in 23 states.

Momentum

As stated early, newspaper stocks have been on fire. Gannett Company, one of the larger publicly traded newspaper stocks got the ball rolling last week with a surprising profit for the quarter despite significantly reduced advertising revenue. However, the most important nugget from their conference call was that they were beginning to see a turnaround from the advertising decline and that they believed the worst was over. All of the other newspaper stocks reporting earnings that have followed Gannett also exceeded expectations. As a result, all the stocks in the sector have benefited.

News

LEE reports earnings 6/30/09. Most of the these newspaper stocks were able to achieve profitability last quarter because of significant cost reductions. Basically, they cut a lot of "the fat". LEE has done pretty much the same thing; consequently, it's a very good chance they'll have similar results. One bit of news that came out a several weeks ago that bodes well for the company was that its board voted not to increase the share price via a reverse split. This decision implies that LEE is confident that it will be able to increase its share price on its own merit. With the NYSE threatening delistment and an earnings report right around the corner, investors/traders have to be fairly confident that the report will be pretty good with so much on the line.

Technicals

See the chart below for LEE.





You can see the stock had quite a run last week on increasing volume. Notice the trend line of the chart in purple. This week's close marks the first time LEE has finished above that trend line. This is a possible sign of a reversal.





For my true technicians, the chart above shows a strong crossing of the MACD (Moving Average Convergence / Divergence) line through zero. This is a more traditional sign of a bullish reversal. Whether you're just a trend follower like me or a die hard technician, all indications are that this stock will continue to move much higher.

Short Squeeze Potential

From those charts you can see that LEE's share price doubled last week. Much of that quick movement was due to short covering. What's interesting is that LEE began last week with about 7 million shares sold short. At the end of the week there were still 5 million shares short according to www.shortsqueeze.com . Therefore, the stock doubled after only 2 million shares were covered. With just 44 million shares outstanding and the float shrinking daily, what will the share price be if the other 5 million shares are covered? I'm not going to assume a linear ratio, but you can reasonably expect a continued fast and significant increase in share price from the $1.21/share it is currently with any upward pressure.

Hedge and Mutual Fund Sector Rotation

I've recently read a bunch of articles claiming that people shouldn't get so excited about the recent earnings and movement of the newspaper stocks because ad revenues are still much lower than they use to be and cost cutting is only a temporary fix. Some have even claimed that those share prices will quickly go back to their historic lows once the euphoria dies down. It's as if every article is written by a short seller trying to protect their short position. What those pessimists failed to write was that the market cares about guidance and improvement. You cannot minimize the improvement and return to profitability of the other newspaper stocks that have reported by simply focusing on ad revenues. The fact of the matter is that all of these companies needed to get leaner and are now light years better than where they were 3 to 5 months ago. The big money guys like Hedge funds and Mutual Funds recognize this and are smart enough to realize the bottom is in and it's now time to buy. Many of these funds have mandatory diversified allocations. You can bet that much of the money that left the sector will eventually be put back in, particularly when there are technical signs of a reversal. After looking up several stocks in the sector that have already reported earnings on www.thebuylist.com , you can see that money is being slowly rotated back into this group. Again, bullish for LEE.

Conclusion

The morning shake and late afternoon pullback that occurred Friday was a great opportunity to start a position in LEE. The late day sell off was pretty predictable because many people wanted to lock in profits from the significant gains of the week. There's a chance Monday that LEE may get off to a sluggish start, but it should only be temporary. A. H. Belo Corp. (AHC), another publicly traded newspaper stock, reports earnings Monday morning. If they follow the same trend as the others, LEE will be off to the races again. Either way, I'm expecting a sizable runup prior to the earnings report on Thursday. If you want to be conservative, you could sell prior to the report, but you may miss out on the chance for significantly higher gains. Keep in mind that Gannett has traded higher 9 of the last 10 sessions. LEE has only done it 4 of the last 5 so don't assume it's overbought. Based on momentum, the high probability of a good earnings report, strong technicals, potential short covering and fund sector rotation, a sea of green could be in LEE's future as well as yours. Lee Enterprises, Inc. (LEE) the next perfect stock.