Martha Shares Overcooked

To be sure, a buyout remains a possibility. Jefferies analyst Robert Routh, Wall Street's lone bull on shares of Martha Stewart Living, says that potential is part of the stock's allure.

"This is a perfect takeout for private equity," says Routh. "You have a unique name-brand with improving fundamentals. You have an overcapitalized balance sheet. They have no debt. They have a ton of cash. They could easily be levered up and taken private. Then, wait a little while and take it public again or sell it piecemeal, and you would not have to deal with the cost of being public."

But even taking aside Lyne's assertion that a sale is unlikely, private-equity investors tend to look for stocks that cheap.

That said, Routh's positive outlook on the stock isn't solely based on buyout potential. Aside from the merchandising business, advertisers that deserted Stewart's publishing business when she was prison-bound have flocked back to Martha Stewart Living magazine following her return, and the company has launched a new title, Blueprint, targeted at a younger audience to tap into new growth.

Also, amid the advertising industry's mad dash for the Internet, Martha Stewart's online potential is a wild card. The company is in the midst of overhauling its Web site, but it has a virtual library of quality content, like recipes and video demonstrations, that could attract heavy traffic in cyberspace.

For Routh, it all comes down to Stewart's public persona and the untapped potential of her brand.

"Martha's going to jail dramatically increased the public's interest level of Martha," says Routh. "The average age of her audience has gone way down. Why? Because she went to jail. Now she's a regular person. She's one of us. She is mortal. It dramatically increases the interest level in Martha Stewart relative to what it was."

But such talk also drove the wave of speculation that pushed up the company's shares when Stewart was getting out of prison and NBC was publicizing its deal to produce her version of Donald Trump's reality-TV show, The Apprentice.

What happened? The show was a flop, and investors took a bath.