What's really driving Martha Stewart Living stock up?

Posted: Friday, January 30, 2004

NEW YORK (AP) Look at the recent run-up in the stock price of Martha Stewart Living Omnimedia. It seems that investors are looking beyond its troubling past and counting on only good times ahead.

Or maybe not.

Just as the court of public opinion is divided on whether Martha Stewart herself is guilty or not, investors appear equally polarized over the likely resolution in her criminal case and what it will mean for the domestic diva's namesake company.

So while the stock has surged more than 40 percent in the last month, there could more to this rally than meets the eye.

It is somewhat surprising to see the recent jump in shares of Martha Stewart Living, the media company known for its home-oriented magazines, TV shows and merchandise.

Investors had avoided the stock through much of the fall, unwilling to make big moves ahead of the start of her January trial. They had good reason.

It has been a bumpy road for the company since news first surfaced in June 2002 that Stewart's name was tied to an insider-trading scandal at ImClone Systems Inc.

She is accused of lying to investigators about why she sold 3,928 shares of ImClone stock just before it dropped sharply on a negative government report about an ImClone cancer drug. A second charge is unusual: that, in declaring her innocence, she illegally tried to prop up the stock of her own company and deceive its shareholders..

Even though Stewart stepped down as CEO and chairwoman from the company last spring after being indicted in the case, Martha Stewart Living continues to struggle with slumping sales and earnings.

But investors, who had knocked the stock in half since the allegations against Stewart first arose, appear to have renewed their interest just as the trial was getting under way. Since mid-December, its shares have climbed from just over $9 to $13.39 last week its highest level in 19 months. It is now trading around $12.50.

Those bullish on the stock say that the rally is a result of investors believing that closure will soon come in this case and that, regardless of the outcome, the company will thrive once its executives can get back to focusing on the business, not on the trial.

And should Stewart be acquitted which even the legal experts are divided on at this stage that could spur an even bigger rebound in the company's business and its stock.

''I think Martha has good market sense and is very creative, but she has built a company with many creative people and she isn't critical in the company's future success.'' said Jamelah Leddy, an analyst at the Seattle brokerage firm McAdams Wright Ragen who has had a buy recommendation on the stock since September.

But others point to far more technical reasons for the stock's recent rise.

It might be due in part to short sellers who bet on a stock's decline getting squeezed. In fact, more than 50 percent of the Martha Stewart Living shares available for trading are being shorted.

In a short sale, investors borrow securities from a broker, which they eventually have to give back. They immediately sell the shares, hoping that price will drop and that they will be able to buy the stock back for less than they sold it for. That is how they make money.

But trouble comes if the stock rises, which may force them to buy the stock back at a higher price than they initially bought it at. That ends up boosting a stock's price even more.

So it could be that those investors who are down on Martha Stewart Living's prospects are actually responsible for some of its stock appreciation.

Of course, there is no telling what's next for this company or its stock. And chances are, even when the trial concludes, investors will still be divided.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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