A “Good Thing” for Investors?

My wife called it big-time when she said that investors should buy Martha Stewart’s stock as the domestic guru went to jail. The stock went from under $10 per share to a recent 52-week high of $37.45 per share. By any measure, this is an awesome stock market performer, especially considering that Martha’s company, Martha Stewart Living Omnimedia Inc. (NYSE/MSO) has been struggling for some time.

Without question, MSO is a perfect example of the stock market’s propensity to speculate. The market just loves to speculate to extremes, both up and down. In actuality, Martha’s company lost over $19 million, or $0.38 per share, in the first quarter this year, at about the same as when it reported losses in the first quarter of 2004.

Revenues in the latest quarter actually fell to a modest $38.7 million, down from $44.5 million in the comparable quarter. All the while the stock was going up and the company boasted a market capitalization of over $1.3 billion. The stock’s great performance must therefore be all about expectations for the future.

My wife actually met Martha Stewart at a winter fair, and describes her as a stunningly beautiful and sophisticated individual. She noted that she is much more majestic in person than on television. Even now, my wife wants to own her stock, but I wouldn’t touch it with a 10-foot pole.

The fact is, the stock is extremely expensive by any measure. My view is that the company would have to, at the very least, double its revenues from their current level and achieve a respectable level of profitability to justify its current valuation. Then again, the stock market is really good at over- and under- valuing securities. In fact, MSO is a perfect example of the stock market’s “herd” mentality, and its propensity to bet on hype, rather than real results.

With a seemingly disproportionate administration of justice in the world, perhaps Martha Stewart’s stay at “club Fed” was exactly what she needed. The expectations for MSO are high, but if anyone can drive adversity into success, it’s Martha Stewart, and that’s a good thing.