You’d be hard-pressed to find an industry in a bigger slump than the newspaper sector. Newsstand sales are down. Circulation is down. Advertising revenues are down. It’s no secret that the Web is taking a big bite out of the business, as more and more readers flock to the Internet to get their news fixes and also to sites like Craigslist, Yelp and Monster.com, to name a few, for classified ads, information about local companies and job listings.

As such, shares of most newspaper stocks have been pummeled and several are trading at nearly 10-year lows. The New York Times Co. (NYT) is down 20 percent so far this year. Gannett (GCI) has plunged nearly 30 percent. And Lee Enterprises (LEE) and McClatchy (MNI) have each plummeted more than 50 percent.

Not even the pending takeovers of Dow Jones (DJ) by News Corp. (NWS) and the private equity-led buyout of Tribune (TRB) have been enough to rejuvenate investor interest in this moribund group.

So with all this doom and gloom, it’s interesting to note that some of the more well-respected institutional investment firms in the U.S. are loading up on shares of these beleaguered companies. Perhaps they sense that the sector may finally be nearing a nadir and that the stocks could head higher as newspaper publishers do more to transition to the Web?

According to figures compiled by data provider FactSet Research, Ariel Capital Management has boosted its stake in Lee and McClatchy in the past few months, for example. T. Rowe Price and Fidelity Management and Research each increased their stakes in Gannett, McClatchy and E.W. Scripps (SSI), which also owns cable networks in addition to newspapers. And Wellington Management, the company that subadvises for some of the Vanguard family of funds, has increased its positions in The New York Times, Gannett and Journal Register Co. (JRC).

So should investors follow the “smart money”? Not so fast.

These firms may be hoping that their bets will pan out in the long-term. But most investors will require Job-like patience before they see a turnaround in this industry and it may not be worth the hassle to own stocks in what is expected to remain a brutally tough business.

One mutual fund manager said investors need to be selective in the newspaper group and not rush into the entire industry simply because the stocks might seem “cheap.” Just because the stocks have already fallen sharply does not mean they won’t fall even further.

“We might look to buy some newspaper stocks on a value basis but we typically move to where the action is in the market and there’s not a whole lot of action in that industry,” said Craig Hodges, co-manager of the Dallas-based Hodges fund.

But Hodges said he thinks that it’s possible that there could be more consolidation in the industry and for this reason, his fund owns newspaper publisher Belo (BLC), which he sees as a likely takeover target because the company generates healthy amounts of cash flow and has attractive assets such as The Dallas Morning News and The Providence Journal. Still, Belo is the only newspaper stock he owns in his fund and it’s not a pure-play publisher either since it also owns TV stations.

To that end, owning newspaper companies that have more than just a print business is key.

Scott Black, president of Delphi Management, a Boston-based institutional investment firm, said this is a main reason why he owns The Washington Post Co. (WPO), which is one of the few publishing stocks that’s up year-to-date. Black said he likes the company not for its flagship newspaper but for its rapidly growing Kaplan educational division, which accounts for nearly half of the company’s revenues.

“The Washington Post, to be frank, is an educational testing service with a minority newspaper subsidiary,” Black said. He does own some Gannett as well though because he thinks the company is well run and is “so statistically cheap that it’s ridiculous.” But he does not think investors should put new money into the newspaper group, even if other money managers are.

Black said that in addition to the threat from the Internet, newspaper companies are likely to struggle in the next few months due to weakness in the financial services and auto industries, two sectors that have historically been big advertisers in newspapers.

“The halcyon era of newspapers is long gone,” Black said. And so, it seems, are the days when these stocks can reward their shareholders.