Reality Check Halts Momentum at Martha Stewart

Advertisers and subscribers have been abandoning Martha Stewart Living's products since the trade came to light. Advertising revenue at the company's flagship magazine, Martha Stewart Living, for instance, has dropped more than 50% this year after falling 30% last year.

However, the latest developments seemed to buoy the company and its optimists.

Reversal of Fortunes?

William Mack, an analyst at Standard & Poor's, downgraded his rating on Martha Stewart Living's stock on Friday to "avoid" from hold. But in doing so, Mack raised his price target to $16 from $12. The latest announcements are favorable, Mack said, and should help the company lure back advertisers.

Mack's price upgrade is based in part on his belief that the company is about to turn around its fortunes. "It's hard to imagine a much worse case scenario for her than what played out over the last year or two," he said. (Mack does not own the stock, and Martha Stewart Living is not a client of Standard & Poor's.)

Those announcements helped chase shorts from the stock. Earlier this month, short interest in MSO stood at a whopping 41% of the company's float. For a company as thinly traded as it is -- less than a million shares trade hands on an average day -- covering those shorts at a decent price can prove perilous.

Despite the short squeeze, the skeptics seem to be returning. A number of investors and analysts question whether the company will see much long-term upside from the latest announcements.

Stewart's decision to serve her prison term before waiting for an appeal means she will return to work sooner than expected. But returning early doesn't mean the company's advertisers will return anytime soon -- if at all. Stewart's decision "does not reverse the negative advertising trends," wrote Drewry.