Friday morning, after hearing that Martha Stewart had been sentenced to 5 months in prison, the first thing I did was to check the stock of the company she founded, Martha Stewart Living Omnimedia Inc (MSO). While I was surprised that the stock had surged 40%, I wasn't stunned that it had gained in value. Somehow I had a feeling that the stock would do well even if she were sentenced to the maximum prison term.
This was a classic example of a relief rally. The stock had languished for months as investors were unsure of the fate of its founder. Once her sentencing term became public, investors clamored and the pent up pressure was finally released. Coincidentally, Friday was also the July's expiration date for stock options. A shrewd speculator could have made up to 20 times the amount invested, if he or she had bought a few options contracts on Thursday.
The MSO stock may still not be a good investment and the long term vitality of the company is far from certain. The company is facing a multitude of challenges and its future is as murky as it was prior to Stewart's sentencing. I wouldn't be surprised that once the excitement has worn off, it would slide to even below its pre-sentencing value. But that all depends on how MSO handles its business now that its founder's legal uncertainty is behind her.
I wonder if she found some time on Friday to sell a few shares of her own. Hopefully this time around she played by the rules.