I wasn’t offering advice, merely stating a couple of facts about how equities behave in the real world. Behavior in markets fascinate me in whatever direction they move, as market moves can teach many life lessons in non-market areas.

As for the sophistication, I’m one of the least sophisticated guys out there. No black boxes, neural feedbacks, or quant programs for me. Much too complicated.

I’m sorry if I irritated you, which it sounds like I did, and I’ll shut up now.

Jeff

OK, I’ll take your word for it. You’re a far more sophisticated investor than I. You make your living off investing. I don’t. I was simply using the way the market tends to move as an example to explain how a 15% profit margin for a business does not translate to a 15% return on investment for an organization like Calpers.

What does individual investing advice have to do with that?

Good example of how some people look to value equities.

However, if I worried about things like P/E’s of stocks and all the other things the general public looks for when they invest in a stock, I’d be broke.

If I traded equities exclusively, I’d be broke.

Commodities, futures, and options are so much less risky than equities if proper risk management is in place.

It’s hard to place a future value on a stock, and anyone who claims to be able to predict the future is full of crap. However, since stocks(and everything else) moves due to the madness of herds, it’s pretty easy to spot a misvalued equity and trade it accordingly. The key is in managing risk, and one can manage risk by purchasing the undervalued equity and selling an equal position of an overvalued equity in the same business and working the spread. Spreading is how the real money is made in any market.

Your 1995 example of a stock that nobody would want to own has good merit. I love to find stocks that are about to do a dividend pass, post reduced earnings, losses, or whatever. You can make very quick money off those dogs. A good, yet inexact indicator of a stock’s strength can be found by looking at how the options on that stock are trading. Much like the quinella board at the track, the options volume at particular strike prices speak volumes.

Jeff

*claps gleefully* I feel like a first-grader who just graduated from crayon to pencil.

Thanks, D.

On the other hand, as I said above (I think but I’m not going to reread all that), newspapers DO make good cash cows. Add them to your conglomerate and don’t invest in them, and they provide cash you can use to buy other, more promising businesses. Eventually, you milk them dry and discard them.

But, really, you’re on the right track in your assertion that newspapers simply must increase revenues. They can make profits for a long, long time, and stay in business because they make profits. But the quality will continue to get worse and worse as expenses are cut to remain profitable.

Thanks. I’m beginning to get your point about making imprecise references to percent of profit. I think it’s this: maintaining a certain percentage of profit means less payout to stockholders if, overall, revenue is declining. Even though the profit margin is maintained, a decrease in revenue (reducing the P/E ratio) means that the stock becomes less attractive to investors.

Again, thanks for the time you took to provide the explanation. That’s an uncommon courtesy, and I appreciate it.

Thanks to you, too, Jeff, for your comments.

Jeff

Margins are NOT always expressed in percentages EXCEPT in the for-profit sector. In the not-for-profit sector, margins are expressed both as percentages and dollars, as in “we had a $1 million positive margin last year.” Since I spent a day last week with the compensation committee of a non-profit physician’s insurance company where we discussed terms used to determine executive incentive pay, and one of those terms was “margin,” I think I have a bit of background in that area.

“Margin” is simply a word that not-for-profits substitute for “profit.’ Their issue is how to reinvest the margins and/or distribute them in incentives.

As for your assertion that for-profits tend to outperform not-for-profits, I simply have to laugh. The example you give is simply a function of deregulation forcing inexpert behavior in order to meet “market” demands.

I can think of a number of not-for-profits that are extraordinary in performing their missions, and do so better,and even far better, than their for-profit competition: COPIC, Kaiser Permanente, Sisters of Charity, Sisters of Providence, The Christian Science Monitor, Harvard (compared to, say, the for-profit University of Phoenix), and the list goes on.

There’s no magic in being for-profit. The issues are the same, regardless. The only difference is (often) in mission and (sometimes) in financing acquisition.

Let’s take Calpers amd stock, and the value of owning stock. Sorry to make this so elementary, but I need to make my point.

The value of stock comes in one or two ways: (1) stock appreciation, and (2) stock dividends. Dividends are cash distributions of profits to shareholders, and most stocks no longer pay dividends. it is generally in the investor’s best interest to get most increase in value through stock appreciation, since there are no taxes on appreciation until the stock is sold and, even then, there is special capital gains tax treatment most of the time on those shares. Most dividends, on the other hand, are taxed at the investor’s marginal rate.

The value of a stock, at any given time, can be a function of many things, including investors’ assessment of risk, but there are two primary drivers of stock prince in most cases: (1) earnings per share, and (2) investors’ overall assessment of the potential for earnings per share to increase in the future. This is reflected in something called “price to earnings ratio.” (Bear wtih me here, OK?)

Let’s say a stock has a $1 earnings per share, and sells on the market for $12. That is a price to earnings ratio (P/E) of 12, right? $12/$1. Stock P/Es tend to fall within certain highs and lows within an industry, depending on investors’ collective assessment of earning per share growth potential. This is why some tech stocks have had, historically, P/Es well in excess of 100, and some low-growth stocks P/Es of 5 or less.

Now, let’s assume that newspaper stocks (pure newspaper stocks, not conglomerate media stocks) have an average P/E of 10, reflecting investor skepticism about future earnings growth potential. The stock will generally not appreciate in value unless earnings per share increase, and please note, Doc, as I’ve said many, many, many times, earnings per share (EPS) is NOT a function of profit margin. It is a function of TOTAL EARNINGS divided by the number of shares of stock. If revenues are declining, one can maintain, say, a 16% profit margin by cutting costs, BUT the earnings per share decrease, which means that USUALLY, the stock’s value decreases.

Now, to Calpers. I have no idea what initial price Calpers paid for its newspaper stocks or even if it owns any. But Calpers is in the business of GROWING the value of its assets. To the best of my knowledge, newspaper assets are NOT growing because EPS is declining, because REVENUE is declining. And there are little or no prospects, at this time, for substantial increases in future revenue. In fact, the current trend is toward declining revenue, which means declining EPS, which means declining STOCK PRICE.

In other words, Doc, I highly doubt Calpers is slobbering over what a good deal its newspaper stocks are, these days. I think they could be persuaded to sell their stocks if someone makes a fair offer, in the same way all stocks are sold for something the buyer and seller believe represent a fair market value.

Let me just go over another point in more detail, if you don’t mind, because despite several posts I’ve made, I just don’t think I’ve gotten something across to you, and that is that profit margin, which so many employees of newspapers focus on so heavily, is not the primary driver of a stock’s value. EPS and growth potential are the drivers.

Calpers is not making 15% on its newspaper stocks UNLESS those newspapers are paying out every penny they earn in dividends, and even then, it’s not likely to be 15%, even if their profit margins are 15%.

Let me explain why with a few examples.

In 1995, Calpers buys MegaCity newspaper shares for $100. There is an annual dividend of $15 they are hoping will grow, and they are also hoping for appreciation in the stock price as the dividend grows. Over time, revenues at MegaCity decline and, while they still maintain a 15% profit margin, ACTUAL profits drop from $ million per year to $500,000 per year, cutting their earnings per share in half. As actual profits drop, so does the dividend. Instead of $15 a share, it is now $7.50 per share, or only 7.5% return on Calpers initial investment.

But WAIT, there’s MORE. Since MegaCity’s earnings per share have been cut in half (DESPITE THE SAME PROFIT MARGIN), and since the P/E remains the same in the industry, the stock price has dropped to $50 per share, meaning that Calpers has lost half the value of its original investment.

That’s not an annual 15% return, Doc. And it’s not a stock most people would want to hang onto.

Fat margins are important in any business, but you need profits to give the shareholders a good return on their investment. Margins and profits usually go hand in hand, but margins are expressed in percentages, and profits are measured in dollars…I’ll take the dollars and let the accountants worry about the margins:)

Profit oriented organizations generally out perform non-profits for a multitude of reasons, efficiency in all areas being the main driving force. One merely has to study the demise of mutual savings banks and the real mutual insurance companies to see this very valid point.

I certainly wouldn’t want to invest my hard earned money in a company that was a non-profit organization, despite whatever margins they claimed to achieve.

Jeff

But I wonder about the psychology of the current system of news biz ownership. How could investors, particularly those powerful institutional investors like CALPERS, be persuaded to relinquish their ownership of a vehicle that currently pays them 15 percent?

True, that’s fallen from the low 20s of a decade ago. But at the moment, it’s a really good investment deal.

Despite the ability to substitute “margin” for “profit,” I still don’t see the news biz changing from a for-profit frame.

Any ideas, folks?

I suspect it’s worth a great deal more than $5 billion, depending on how you look at it. They claim 9 BILLION page views per month. That’s a lot of eyeballs. The trick with craigslist would be in converting those views into revenue, given the grungy approach over there and the fact that they charge only for job ads in only 10 markets.

A media consortium could buy craigslist, but it wouldn’t replace classified revenue anytime soon because the current craigslist users don’t pay for their ads. And, the barrier to entry for a new, free craigslist to compete with the old one that would now charge for ads is very, very low.

In other words, trying to turn craigslist into a huge revenue generator might simply mean spending a lot of money and not being able to do it.

You nailed it on the head with this post.

Every business should be for profit, and should be subject to the forces of free market capitalism. I’m not an expert on the subject, but it seems to me that the newspaper business needs to find a business model that works(is viable), much like the recording industry needs to do the same.

Jeff

1: I just saw that Craig’s list is on pace to beat $80M in revenue this year and that it’s valued in the $5 billion neighborhood. That’s all a result of the shortsightedness of news execs, but this you know. However, if the newsies want to get back in the game, they either find a way to compete with this behemoth or … they buy it? What news institutions have the financial wherwithall to make that happen, assuming it were for sale?

2: The future of the paper, yes. We’ve talked about this before, and I think the evolution of the paper product is key to the next generation of news. For starters, they have to stop seeing themselves as papers with an online adjunct and begin seeing themselves as purveyors of news. Kinda like the music industry still confuses music with the CD, which is kinda like confusing milk with the truck that delivers it, news agencies are still desperately clinging to the physical medium. Why? They know how to produce it, deliver it, monetize it, etc. They haven’t yet figured out that they’re in the buggy whip biz, have they?

Paper is a delivery vehicle for certain kinds of content – and not the kind of content they’re focusing on today – as is online. Oh, yeah, and mobile, you idiots.

The newspaper can no longer stand as a primary vehicle for the delivery of news. It has to evolve into a magazine of some sort, focusing on opinion, perspective, and depth analysis of things that have already been reported.

I hope people dive in here. This is a great area to talk about, and we need to talk about it since the news industry isn’t gonna….

Blogging and social Networking are not Problems that must be worked around, but are the actual base of actual News, and have been so for thousands of years. Obviously not as Internet Blogs, but always as the latest technology that those in power had not yet figured out how to control. In China they even used cupcakes.

The key to a socialized society, is the same as to a socialized dog. You make the rules so they do not tear up the furniture, or leave surprises on the carpet. Information of Record needs to be publicly available as a cost of creating the government or whatever in the first place, with criminal sanction for altering or destroying it.

It is certainly not the need to profitably dig up what folks are using your taxes to hide from you, faster and more profitably than it can be buried, any more than it is your responsibility to profitably purify a stream that someone has made a fortune by poisoning. Like the unsocilalized dog, there is no end to the mischief, when lesser mischief goes unaccounted, and so it is with actual news.

By creating a very expensive, and needlessly limited, Mainstream Media, we have abandoned the Public Square to Power’s exclusive playground. But by unintended consequences the Internet has temporarily changed that, and given us the equivalent of those Ming Cupcakes, to take our country back.

If we manage to Socialize Society (like the dog) again, perhaps we can yet manage to create a world when parents again envy their children instead of the reverse. Flocks of pigs will out compete geese for airspace flying South for the winter, before money and power start supporting real news without a gun at their back.

There’s really no difference between not-for-profit and for-profit except in paying taxes, not distributing profits to owners (so margins can be reinvested), and in certain rules regarding remuneration for top officers of the organization.

The trick, of course, is in the conversion. Generally, this could be done with a leveraged buy out, assuming current margins will cover debt service. That’s a bit of a ball and chain to carry around, but not paying taxes and not having to produce adequate earning per share should make it work in many cases.

I can see that a not-for-profit model could work. But how could that be scaled up? The U.S. has 1,400 daily and about 7,000 weekly newspapers. I just don’t see such a model working at that scale.