Gannett (NYSE: GCI) lost more than half its third-quarter profits year-over-year, as the newspaper industry shows yet another sign of decline. A substantial drop in ad revenue was the primary reason for the plunge.

The newspaper giant was able to stay in the black because of aggressive cost cutting, a move that can work for only so long. For now, it's the most popular option available to the beleaguered industry, as evidenced by a New York Times (NYSE: NYT) announcement that it would slash another 100 positions from the newsroom, and more positions elsewhere.

Paper is King! Long live the wood products! Ah yes, that is the single most dependable mantra upon which my home state of Wisconsin is built. First there was the early fur trade that brought eager French entrepreneurs into the region. Then, there were profitable but short-lived mining opportunities that helped bring in the railroads. As land was cleared and transportation options increased, we became farmers and dairy providers extraordinaire. But perhaps most important of all have been our trees. Remember Chicago, we built you not once but a second time also after you burned the first efforts to the ground!

So what has this got to do with investing? Well, if you don't even feel a connection, perhaps you'd like to read further. There's a lot of activity swirling around the wood products sector and it's not all bad. For instance, did you know that recent polls have concluded that the decline in newspaper readership has stalled? Yes it's true, but the pollsters would like you to interpret that as meaning that internet (blog) readership is therefore in decline. I'm sure it makes no difference that the polls I viewed were conducted by agencies who mostly serve the televised news services (chuckle, chuckle, snort, snort). Perhaps one day they'll get wise and realize that newspapers are the apples, blogs are the oranges and televised newscasts are more like tasteless avocados, which are of little use until made into guacamole. For further input on the subject of newspaper journalism and it's future, please read the excellent article by Jeff Jarvis at BuzzMachine. Newspapers aren't suffering as badly as some would have you believe. I'll write more on this later.

This past week we received news that Time Warner (NYSE: TWX) is planning to cease Life Magazine publication. Then shortly after that we got word that we'd see the demise of Child Magazine. On both counts I'll plead, I'll believe it when I see it, or when I don't see it as the case may be. I'd give you even money on the possibility that both declarations of publication cessation are threats made towards advertising space clients as much as they're announcements to an affected readership. If I'm wrong, then you had better buy shares in the PC notebook manufacturers because they'll be selling a whole lot of them as our magazines drop out of existence one by one. Just remember that I don't think anyone ever got mugged on a subway for a magazine, and you may need to take you laptop along on your next visit to the doctor's or dentist's waiting room.

The newsprint industry has been one disaster of a sector to invest in. However, as Barron's Andrew Bary pointed out in a contrarian piece on the Bowater Incorporated (NYSE: BOW) and Abitibi Consolidated Inc (NYSE: ABY) merger, this might be a sign this industry is finally bottoming out.

Some relevant stats:

• Bowater shares are down to $23 from a high of $59 in 2000 while Abitibi shares are down from $20 a decade ago to $2.80
• The combined company will be the third largest forest-products company in the US behind Weyerhaeuser (WY) and International The merged company will have 50% market share of the North American newsprint business
• The decline in newsprint demand might have bottomed as demand from emerging markets is beginning to offset the decline in mature markets. Newsprint demand grew 1% last year. However, North American demand decreased 7%
• By 2008, global newsprint demand could increase 2%, according to Citigroup

Citigroup indicates that Bowater's poor first quarter performance might be the bottom for the Canadian-based company and forecasts earnings of $ 1.00 in 2008 jumping to $2.35 in 2009. Citigroup has a target price of $35. Citi also has a $5.00 target on Abitibi.

The merged company also has $2.0 billion of assets it could sell to paydown the $5.6 billion in debt of the combined companies. The merged company will generate revenue of $8 billion.

The newsprint industry is the contrarian of contrarian investments. While most commodities have performed well this decade, this sector has been a disaster. However, it is time to start looking at these two companies. Start listening to conference calls to see if the companies can hit their quarterly earnings targets. If they can, these stocks could have a good run.