Bernie Courts Martha

12/31/2004 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

With a proprietary system known as expectational analysis, Bernie Schaeffer combines fundamental, technical, and sentiment indicators. With a strong reliance on contrary analysis, it's not surprising that he looks to controversial Martha Stewart for his top pick.

"Our top pick for 2005 is Martha Stewart Living Omnimedia (MSO NYSE). The shares have the potential to build on the positive price momentum that has occurred in 2004. The extreme in pessimism from Martha’s insider trading scandal has yet to be fully unwound, which could present another major opportunity in 2005. The shares hit bottom in July 2004, just a few months after Martha was the subject of a negative cover story in a major news publication. As of mid-December, the stock was on pace to triple from its 2003 close.  

"With Martha Stewart currently serving a five-month sentence, things are looking brighter for the company as we move into 2005.  It was announced in early December that she will star in a high-profile daily cooking and crafts show on NBC in September. Furthermore, there is speculation that Martha will appear in a prime-time reality show, which could also boost the company’s image.  In late November, it was reported that the scandal did little to hurt the brand, as a survey indicated planned renewals for MSO’s flagship magazine were near 70%, well ahead of industry norms. 

"Despite the tremendous rally in 2004, there are still many doubters, which could translate into future buying power. For example, short interest is huge, as it represents about ten times the equity’s average daily volume and 40% of the float. Wall Street is also among the skeptics, as MSO is among the lowest-rated stocks. According to Thomson/First Call, six analysts cover the shares. None rate it a buy, one rates it a hold, and five rate it a sell.  A combination of short covering and analysts upgrades could propel the shares higher in 2005, even after the stock's impressive price gains in 2004."

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