We've put three quarters behind us in 2009, and the most recent one was merely another miserable step downward for the beleaguered newspaper industry. Total ad revenue plummeted in the third quarter to $6.4 billion for the print jockeys, a decline of 28%. This info from the Newspaper Association of America drives home the notion that conditions will only worsen for the newspaper industry. So, if you're hoping those shares of New York Times Company (NYT), Gannett (GCI) and Washington Post Company (WPO), holding your breath will leave you little more than dizzy.

Of the total advertising revenue generated in the third quarter of 2009, $5.8 million came from print, the lowest quarterly amount this year. The $623 million in online advertising sold by America's newspapers was also 2009's worst. Both are down substantially from the same quarter in 2008, when the newspapers posted print ad revenue of $8.2 million and online ad revenue of $750 million, according to NAA data. At this time last year, we lamented year-over-year declines approaching 20%. Now, we have the same feelings as ad revenue drops approach 30%.

This winter, a bit more of New York is headed to Florida. Layoffs for 2010 have already been announced for the New York Times Company(NYT). The New York Times News Service will lose 25 editorial positions next year and shift the service's editing to one of the parent company's Florida newspapers. At present, the news service has 30 editorial jobs. Some of the layoffs will occur in February, and the others will happen in May.

These layoffs are not included in the planned slashing of 100 jobs in the flagship newspaper's newsroom -- a workforce reduction of 8% that should take hold by the end of the year. The NY Times is also ceasing pension contributions for nonunion employees.

"We're looking for profits in a sector of the economy that almost everyone has written off -- newspapers," says Glenn Rogers.

In Internet Wealth Builder, he explains, "I have been involved in the newspaper industry for good portion of my career; so it has been with great dismay that I've watched the industry crumble over the last few years." For contrary investors, he looks to New York Times (NYSE: NYT) and Gannett (NYSE: GCI).

"The Internet in general has siphoned off millions of dollars of advertising that used to belong to the newspaper industry.

Riddle me this investors: is the smart money heading into newspaper stocks? Don't laugh but CNN/Money's Paul La Monica points out that some well-known funds are increasing their stakes in this most hated of sectors on Wall Street.

But before people start loading up on the New York Times Co. (NYSE:NYT), E.W. Scripps Co. (NYSE: SSP), Gannett Co. (NYSE: GCI), Lee Enterprises Inc. (NYSE: LEE) or McClatchy Co. (NYSE: MNI) consider that these shares are down double-digit percentage points because their businesses are floundering. Yes, online advertising revenue is picking up but remember that these companies will get the vast majority of their profit and revenue from dead trees for some time to come.

But has all of the bad news been priced into these stocks? Ariel Capital Management, Wellington Management, T. Rowe Price and Fidelity Management and Research seem to think the stocks have nowhere to go but up, La Monica says.

They are certainly buying low. Can they sell high?

In late December, Avista Capital Partners agreed to pay $530 million for the Star Tribune, less than half of what McClatchy paid for it in 1998. The deal comes amid growing concerns about the future of newspapers, which are facing competition from the Internet. But in spite of the ugly long-term outlook for newspapers, they may make an interesting investment for now.

For starters, Avista is purchasing the newspaper for 6.5 times its cash flow. Newspapers don't have the large capital expenditure requirements that many more booming businesses do. The industry is in decline, but it's still making money. I'm reminded of a profound statistic that I first read about in Jeremy Siegel's book The Future for Investors: Since 1957, railroad stocks have outperformed airlines, trucking, and the S&P 500.

This is of course not attributable to dramatic growth in the railroad industry. Rather, most investors saw that the companies were in decline and the share prices were driven down, and then provided a good return. The moral of the story: valuation matters. Most stocks are a good deal at the right price.

Are newspapers the new railroads? There are numerous similarities. Railroads were replaced by airplanes and trucks, but the railroad stocks were the better investment. Newspapers are being replaced by the Internet, but that in no way means that Internet stocks are better buys. Here's a quick look at some of the bigger newspaper stocks:

• Gannett (NYSE:GCI): Owner of 91 daily newspapers, including USA Today. The also own around 1,000 non-daily publications. Trades at around 11 times cash flow.
• E.W. Scripps (NYSE:SSP): Owns some newspapers, but also television stations, including HGTV and the Food Network. Also owns Shopzilla.
• Tribune (NYSE:TRB): Trades at around 8 time cash flow. Owns 11 daily newspapers, the Chicago Cubs, television stations, and other media interests.