Martha Gets 5 to 20; Investors Get Life
By Janice Revell

(FORTUNE Magazine) – It's certainly debatable whether Martha Stewart's conviction on all four counts in her federal obstruction-of-justice trial was, as one juror put it, "a victory for the little guys who lose money in the market." But there's no question that the guilty verdict was a huge win for the legions of investors who had bet that the domestic diva would fall hard--and take the stock of Martha Stewart Living Omnimedia along with her. Heading into the trial, the number of shares dumped by short-sellers (investors who sell borrowed shares in the hope of buying them back after the stock has plunged) represented an astounding 55% of all shares trading in public hands. That's a ratio that only the most financially troubled or wildly overpriced companies ever approach. It's now looking as if the short-sellers' payoff is going to be hefty when the dust finally settles: Within minutes of the guilty verdict, the company's stock plunged by more than 20%. And many observers say that's just the beginning of what's likely to be a tortuous ride for the company and its shareholders.

The key issue, of course, is that Martha Stewart's image is inextricably entwined with her company's products--and the label "convicted felon" doesn't exactly play well with the ad agency folks on Madison Avenue. Indeed, most industry watchers predict that advertisers will flee from Martha's magazine and television offerings, which account for more than half of the company's overall revenues. Sales of Martha Stewart--branded merchandise like towels and bed sheets at Kmart could fare better--thanks, ironically, to the trouble-plagued retailer's own problems. "Martha's good news is that Kmart desperately needs her," says Seth Siegel, co-founder of Beanstalk Group, a New York--based brand licensing agency. "If this was Wal-Mart, they would say goodbye to her right now."

Martha Stewart Living Omnimedia is sitting on a hefty $180 million stockpile of cash and has no debt, meaning that bankruptcy isn't a likely outcome. But given Martha's guilty verdict, that cash could evaporate quickly if, as expected, unhappy MSO shareholders launch lawsuits against the company. What's more, management will have to spend some serious money repositioning the company into a business that isn't so heavily tied to Martha--if that's even possible. Says T.K. MacKay, a stock analyst with Morningstar: "The verdict won't sink the company overnight, but it's difficult to say where this company will be in the long term." Bottom line: It's looking like "buy on the dips" is one Wall Street adage that doesn't apply here. --Janice Revell