Michael Shulman

Profits in Martha Stewart

by Michael Shulman   07/25/08

There are many reasons to bet on a stock going down, whether you directly short the stock or instead buy put options as a lower-risk way to capitalize on a stock's downside.

If you wouldn't be caught dead owning the shares, that should be a pretty good indicator that the stock instead belongs in your short-side portfolio. But how do you go about picking the potentially biggest losers?

Like the saying goes, "It's what's inside that counts." And if a company, stock or sector is ugly on the inside, it's only a matter of time before the ugliness -- in the form of broken business models, less-than-spectacular corporate leadership, companies that are losing their competitive edge, and other conditions that signal their crumbling fundamentals -- shows on the outside.

Stocks go down all the time. And there's nothing wrong with turning their loss into YOUR gain.

Speaking of companies that make short-side investors smile, Martha Stewart Omnimedia (MSO) is a great example of how much money there is to be made when the company itself isn't making any.

Omnimedia recently came across my short-side radar as a two-pronged recession play -- as it has been impacted by both the housing depression and the pullback in consumer spending.

Several months ago, ChangeWave Alliance surveys started revealing that the bloom was coming off the consumer rose -- even among the well-heeled folks we survey -- and that spending growth was slowing.

When you're looking to get situated on the short side, you want to get into the names that are about to take a serious turn for the worst. And in late September, Martha Stewart's empire caught my eye as a potential casualty due to a perfect storm of events that was going to kneecap its share prices.

And I'll admit, I love saying it -- I was right!