It's no secret that compact discs are on the way out as the preferred method for distributing music, and their decline has continued to accelerate. According to Nielsen SoundScan, 500.5 million albums sold as CDs, cassettes, LPs and other formats were purchased last year, down 15 percent from 2006's total.

Including digital music download sales and music videos, music purchases were up 14% from 2006. What should investors be looking at here?

Perhaps paradoxically, I don't think digital music is the way to play this. The fast-growing innovator often lags that declining old-economy company in terms of stock market returns because investor sentiment can be overly negative. For instance, railroad stocks outperformed airplane stocks (and the broader market) by a wide margin, even as railroads lost their status as the major method of travel. The reason? Railroad stocks were beaten down so badly by the headlines about their demise that they became tremendously undervalued.

The music equivalent of the railroad is Handleman (NYSE: HDL), a stock that has frustrated bottom-fishers for years. The company manages the music category for retailers like Wal-Mart, and well-known value investors like Joseph Harrosh and Marty Whitman have accumulated stakes in the company, even as the stock has continued its decline.

The stock trades at a huge discount to its (probably overstated) book value, and has had trouble adapting to changing trends in the industry. But at its current price, it may be worth a look for contrarian investors who aren't afraid to own stocks that other people snicker at.