Contrarian investing: Gannett vs Facebook
Here's why I would rather own the old school newspaper publisher than the social network.
Back in September, I went out on a limb in a column on TheStreet entitled I'd Rather Own Gannett than Facebook. It was a bit controversial at the time, because it suggested that the dinosaur was a better buy than the slick, newly public, must-own behemoth.
I don't mind being a contrarian, because that's part of what comes along with being a value investor. I also don't mind being wrong, because that comes with the territory, too. But in this case, so far anyway, the sentiments in that piece have demonstrated an important investment lesson.
In the eight months since that column ran, Gannett (GCI) has performed extremely well, with shares up about 52%, while Facebook (FB) is up about 19%. Granted, 19% in nothing to sneeze at, especially given that the S&P 500 ($INX) is up about 12.5% during the same period. But Gannett has been the winner here, so far anyway, which may be ironic to many.
Chances are, that you have more likely logged into Facebook in the past 24 hours than you have read a copy of USA Today, or any of the other Gannett-owned newspapers. Let's face it -- Facebook is still a somewhat shiny new object, used by millions. Some seemingly log every event of their day for all to see -- quite annoying, I might add -- and are practically addicted to it. That level of awareness and buzz is something that Gannett cannot claim. While Facebook has grabbed the headlines, Gannett has quietly gone about its business, successfully resurrecting a company that looked like it might go under just four years ago.
The investment lesson here is all about expectations. Little has been expected of Gannett, and the company has flown under the radar, paying down debt, raising its dividend, buying back shares, and delivering some very good results since 2009. What has long been seen as a newspaper company is much more, and the market may finally be figuring that out. Gannett's broadcasting segment generates much of the company's operating income, and last month's surprise bid for Belo (BLC) will expand that business dramatically.
Meanwhile, expectations for Facebook have been huge. Despite a 24% pullback since late January, shares still trade at seven times 2014 consensus revenue estimates, and this is still a $60 billion market-cap company.
Now, there's no question that this is not a fly-by-night business with no prospects. There's $9.5 billion in cash and short-term investments on the books, and the company has delivered some solid margins. But high expectations and the inability to deliver the lofty growth expected by investors are the reasons that the stock is down 45% from its all-time high the very first day it traded, May 12, 2012.
Take the ugliest looking company, the "dog with fleas" of which little is expected. Compare it to the latest Wall Street growth darling. If the former can show some signs of life, a turnaround of sorts, its share price is somewhat likely to prosper. If the latter, with built-in high expectations can't deliver, watch out. That's why I'd still rather own Gannett than Facebook.
High, unachievable expectations can be dangerous to the wallets of unsuspecting investors. A company's products may seem cutting edge, but there's often a disconnect between price and value. On the flip side, "dogs with fleas" don't always turn around, but I'll save the "value trap" discussion for another day.
At the time of publication the author held no positions in any of the stocks mentioned.
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