“He who is without a newspaper is cut off from his species.” – PT Barnum
But let’s face it: Selling newspapers and print advertising is a dying business.
It’s so challenging that in December 2011, the Davenport, Iowa-based media company was forced to file for Chapter 11 bankruptcy protection to refinance nearly a billion dollars worth of debt. But it’s important to note that the company wasn’t trying to stiff its creditors, it merely needed to extend the maturity of the debt.
The following month, in January 2012, Lee quickly emerged from the bankruptcy courts. And despite the bearish trends in newspaper subscriptions and print advertising, the company’s been getting stronger by the quarter by aggressively reducing its debt and growing its digital presence.
Lee’s management has made debt reduction their primary objective. And, as you can see, they’ve done a phenomenal job of reducing the debt over the past four years. In fact, they’re within a few quarters of being able to direct some of their free cash flow towards buying back shares, investing in new areas of the business, or paying a dividend.
Follow the smartest money
But debt reduction alone won't grow the enterprise; only bringing in new business can do that. And who better to partner with than the master himself, the Oracle of Omaha, Warren Buffett and Berkshire Hathaway Inc (NYSE:BRK.A, NYSE:BRK.B).
On June 26, 2018, Buffett decided Berkshire needed help managing its newspaper and digital operations, and Lee Enterprises was hired to get the job done. At the time of the announcement, Warren Buffett had this to say:
Lee Enterprises’ growth in digital market share and revenue has outpaced the industry. Lee also has led the industry in overall innovation and performance, all while faithfully fulfilling its public trust as an indispensable source for local news, information, and advertising. Our missions and goals match exactly, our markets are similar, and we both have excellent managers. Operating together will strengthen both of us, and lee is logical to lead the process.
If you’re a microcap trying to grow your business, you need partners. And when it comes to forming alliances, there’s no better group to team up with than the folks at Berkshire Hathaway.
J. Carlo Cannell is the founder and managing member of Cannell Capital LLC. And while you’ve probably never heard of this long/short activist hedge fund manager who invests the bulk of his fund’s capital into companies with market capitalizations of less than US$500mln, Cannell has been delivering spectacular returns for years.
According to 13F-hedge-fund-tracking website WhaleWisdom.com, Cannell Capital’s microcap investments have generated a nearly fourfold return for its investors over the past five years and more than sevenfold over the past 10 years.
In digging through my stack of first-quarter 2018 13F filings with the Securities and Exchange Commission, I noticed that Cannell reduced his ownership stake in Lee to a paltry 57,529 shares at the end of 2017, but then went on a massive buying spree in the first quarter this year, buying more than 1.6 million and boosting his fund's total stake to 1.7 million shares.
Now, given Cannell’s record over the past five and 10 years, if he sees value in this US$185mln Midwest newspaper company, perhaps all microcap traders should give Lee Enterprises a second look.
The technical picture improves
After a difficult decade, we’re finally beginning to see signs of improvement in LEE’s stock chart.
Since rebounding from the financial collapse in the second quarter of 2009, LEE’s chart has formed what’s known as a symmetrical triangle, or a coil. And often, a valid breakout from a coil pattern marks a continuation in trend. In this case, we’re looking for LEE to build on its rally from 2009.
Lee Enterprises Chart
If we take the widest part of the multiyear coil and add that to the breakout point, we arrive at a figure near $8.80. So, if you’re bullish on LEE, that’s your long-term objective.
The bottom line is Lee Enterprises is a microcap company that’s earned the trust of Warren Buffett, has attracted the financial interest of an activist hedge fund manager with a stellar track record, and has an improving stock chart.
All these ingredients can underpin a new bull market in a stock.