Reading Into Profits

 | Mar 27, 2014 | 12:30 PM EDT
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Mark Twain famously said, "The reports of my death have been greatly exaggerated." The same could be said of the publishing industry.

While some print publishers are certainly struggling with the digital revolution and facing newly minted media competitors like Jeff Bezos and Amazon (AMZN), others have adapted to the new reality and are thriving. One such publisher is the Europe-based Reed Elsevier (RUK), a behemoth in the publishing world. Despite its European roots, 51% of the company's revenues come from North America. Its holdings include the database LexisNexis, a mainstay of the legal and business communities, and a leading medical journal, The Lancet, as well as Scopus, which the company calls "the largest abstract and citation database of research literature in the world." It is also in the business of organizing exhibitions.

Reed has market dominance, plenty of financial muscle and ample management savvy. These are reasons enough to consider investing in it. But there is also another reason: My Peter Lynch-based strategy pegs Reed as the publishing equivalent of a bestseller. This is one of several strategies that I created based on the writings of great Wall Street investors. Lynch was a legendary mutual fund manager, and he emphasized the importance of the PEG ratio, which is price-to-earnings relative to growth. Investors want growth and are willing to pay for it, but Lynch did not want to overpay for growth, so he created the PEG. As long as the PEG is no more than 1.0 ($1 for each percentage point of growth), the investor is buying the stock at a reasonable price. Reed's PEG is a very acceptable 0.82.

Another factor Lynch focused on was debt: the less of it the better. One cannot get to a debt level lower than Reed, which has zero debt. This is another big plus.

Reed Elsevier is not the only publisher awash in black ink. Another is Meredith Corp. (MDP), headquartered in the very un-media town of Des Moines, Iowa. Established more than 100 years ago, it has built a sizable stable of well-established magazines, including Better Homes & Gardens, Family Circle and Eating Well. In addition to its publishing assets, the company owns 14 television stations in markets including Atlanta, Kansas City, Phoenix and Portland.

Meredith is a favorite of my Joel Greenblatt-based strategy. I know of no reputable strategy that uses fewer variables than Greenblatt's two. One is earnings yield, which measures how much of a return, or yield, the investor could expect if they were to buy the entire business, including all of its debt. The second is return on total capital, which looks at how well a company uses the capital it employs.

The strategy ranks each company from among all the thousands of companies on the NYSE and Nasdaq. It then combines the two rankings to create a final ranking. The top 50 get the strategy's approval. Meredith earns a ranking of 38, meaning it is worth buying at this price.

These are well-established companies with proven ability to weather the storms now buffeting the publishing industry. Plus, their stocks are well priced. You do not even have to be an avid reader to be an avid investor in these companies.

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