A Pricier Neighborhood for Martha Stewart?

According to one technical analyst, a bottoming process for the company's shares is about over, and the next move is up

By Gene Marcial

Shares of Martha Stewart Living Omnimedia (MSO ) are just about finished "rounding out a bottom." According to technical analysts, who focus more closely on a stock's performance than on the company's business fundamentals, Martha Stewart is in the homestretch of completing its move out of a "bottoming process." That is, the stock is getting ready to shoot up to higher ground.

So some investment pros have started accumulating shares, as gleaned in part from the stock's volume activity, which has been swelling whenever the price is rising. Martha Stewart creates "how to" content and related products for homemakers and other consumers. It leverages its brand name across a broad range of media, including television shows, and retail outlets, including Kmart. The company operates in various fields, such as gardening, decorating, entertaining, and holiday celebrations.

Based on its fundamentals, Martha's stock "isn't cheap," argues investment adviser Andrew Addison. For one, it trades at about 65 times analysts' estimated 2000 earnings of 41 cents a share, and 47 times estimated 2001 earnings of 56 cents. That's still quite a rich p-e, says Addison. And it's trading at a high ratio of 1.5 times revenues. But overall, he likes that its business fundamentals are improving: Earnings in the third quarter have doubled, and estimated full-year 2000 earnings are up 70% from a year ago.


  "But Martha Stewart's shares are cheap on their technical merits, and so we are very bullish on the stock based precisely on its technical behavior," says Addison, of Addison Investment in Franklin, Mass., which publishes a research service for institutional investors.

Martha's stock has dropped from 50 a share right after its initial public offering on Oct. 19, 1999, to a low of 13 on April 17, 2000. It has since started creeping up and is currently at 26. The IPO price was 17. Addison, who looks at stocks mainly on their behavior based on technical parameters, recommends buying Martha Stewart shares at their current price levels while they're in the process of riding up from their lows. "My work shows that this is the time to accumulate the stock -- before it starts moving up to the 30s level," adds Addison.

The primary technical benchmarks he looks at are a stock's price action, volume flows, and relative strength.

On price, the stock has formed a well-defined pattern that shows an upward bias, says Addison. It has been trying to move up from its April low of 13, and since the end of December, the stock has shown a clear pattern of advancing from that bottom.

The volume flows show increases each time the stock is moving on the upside. And when it's moving sideways or downwards, the volume pattern ebbs, he notes. "That tells me that the stock is showing a volume flow that is very positive," he says.


  On the basis of "relative strength," Martha Stewart's stock, notes Addison, has been outscoring the Standard & Poor's 500-stock index since December. MSO has gained some 35% year-to-date, notes Addison, while the S&P has edged up by just about 3%.

"According to my work, all three technical factors are providing Martha the power to move up to the 35 price level," says Addison. And once it breaks through that upside barrier, it should be able to go toward its old high of 50, he adds. As far as he can see, the stock is on its way up, and any help from the company's fundamentals will only enhance its path to a loftier level. If he's right, Martha just might add another "how to" to her list: How to track a stock, and win!

Marcial is BusinessWeek's Inside Wall Street columnist

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