Is Martha Stewart's Run-Up a Good Thing?

"That seems like a very generous valuation," the fund manager said.

The valuation seems especially rich given that Martha Stewart Living now posts steady losses and faces a much different environment:

Since 2001, Kmart(KMRT Quote) -- which sells Martha Stewart Everyday products under a license from Stewart's company -- has gone in and out of bankruptcy, losing millions of dollars in sales and closing hundreds of stores in the process.

Earlier this year, the company ceased production of its primary syndicated television program, Martha Stewart Living. Although the company is airing reruns and has signed deals for a couple of new programs, analysts doubt it will be able to charge advertisers the same rates as before.

Competition has increased. Time Warner's (TWX Quote) Real Simple has hauled in more advertising revenue this year than Martha Stewart Living magazine. Budget Living and other titles also are luring away the company's readership and advertisers. In contrast, Martha Stewart Living has seen its advertising revenue plunge 53% this year after dropping some 31% last year.

And don't forget Stewart herself. A still-pending civil case could result in Stewart being barred from a significant role in her company. While the company has taken steps to distance its products from Stewart, most are still clearly identified with her.

In the wake of all these problems, Monticelli is somewhat optimistic about the company's long-term prospects, and sees Stewart's early prison term as a positive for the company.

But even he thinks that the company's valuation has gotten ahead of itself. "I had trouble convincing myself it was worth $11," Monticelli said. "I don't know anybody who is saying they love this thing or has a clear idea of how the company will perform. It's a muddy situation at best."