Whatever happened to reality TV? Recent coverage of Martha Stewart’s business prospects has been anything but.

Speculation on the street that NBC is having trouble selling ad time on Martha Stewart’s upcoming Apprentice show could explain the virtual avalanche of puff pieces on the “domestic diva” coming out of MSNBC and CNBC.

Here’s the reality.

Last week ValueAct Partners, a private equity group that once owned 22% of Martha Stewart Living Omnimedia [MSO], reported to the Securities and Exchange Commission that it had sold over 900,000 shares of stock in recent weeks at prices north of $32 per share. The firm now owns only 342,000 shares, down from its original stake of 4.6 million shares. They are, as they say, voting with their feet.

There is a short position in the stock of 6.85 million shares, or nearly 40% of the total float. That is a huge figure. And, yes, the hedge funds are short the stock.

The analysts are unanimously negative on the stock. How often does that happen?

Why all this gloom? Because whether Stewart is in jail, in her Bedford house, or on the moon, the company is in shambles. Critical people are either leaving or being pushed out as the corporation awaits the impact of Stewart the chief editorial and media director, who presumably may try to regain control of the company.

Because she is now a convicted felon, Stewart cannot officially regain control of the company. She is evidently negotiating with the SEC to give her an exception, or to have the restriction lapse after a period of time. However, as the largest shareholder, and for lots of other obvious reasons, she will no doubt have considerable influence, even without a title.

It may be that Sharon Patrick, the former CEO who left in November, and who is credited with making a real business out of MSO, did not relish relinquishing control to Stewart.

Suzanne Sobel, the executive vice president of MSO in charge of publications, is another recent casualty. Maybe these women are concerned that Stewart will win her appeal, due to be heard March 17, and will once again head the company.

After all, the latest move on Stewart’s part was to negotiate a deal with NBC which can presumably make a ton of money for her, but not one dime for the company. That doesn’t seem exactly cricket, or particularly helpful to her shareholders.

So how is the company doing? Not well. MSO lost money last year and is expected to report further losses for this year. It is also generating negative cash flow. Nonetheless, the stock would appear to be suggesting good times ahead. When Stewart was sentenced to prison, the stock was selling at about $8 per share. It subsequently started to climb and recently traded as high as $36. On Friday, the stock dropped sharply, to close below $31, down nearly 10% on the day.

Where should it sell? According to Jim Chanos, head of Kynikos Associates, the stock is worth $6-$8 per share, based on fundamentals such as earnings and cash flow. Mr. Chanos, who has built a small empire selling stocks short, is skeptical not only of the company’s prospects, but also dubious about the possible “spillover” effect from Stewart’s upcoming “Apprentice” show.

“The qualities which will make the show a success are not likely to attract corporate advertisers”, according to Mr. Chanos. In other words, to draw a large audience, Stewart is going to have to show some attitude, like the Donald, and it may not be pretty. This will not be out of character, but it may come as a surprise to her support group. Having her stand beside a sink and exhort would-be assistants to peel tomatoes faster in her usual monotone won’t get the ratings.

David Rosen, head of Graham & Dodd Value Fund, is slightly more optimistic. He targets a price of $12-$15 for the stock, but only if Stewart’s lines begin to sell better through the Kmart stores after the Sears acquisition. Last year, volume through Kmart sank 13%; it consequently seems unclear whether Sears will pick up the line. Also, Mr. Rosen needs to see the company turn a profit. Such demands!

So who has been buying the stock? Mostly retail investors, or, in other words, real people who are probably convinced that Stewart got a raw deal, and who are trying to show support. The kind of people, for instance, who have been sending Stewart perky messages via the “Save Martha” Web site. The stock has risen on little volume, and the average purchases have been small.

Exceptions are Goldman Sachs, and Fidelity Management, both of whom bought shares in the fourth quarter. They must surely be looking at different tea leaves.

A fall-off in publicity now that Stewart is in Bedford whining about her broken cappuccino maker is all but inevitable. Attention may return to the dismal reality at the company, which will not be good for the stock. Let’s hope that all the nice people who love Stewart don’t get burned. If they do, maybe she can whip up some herbal remedy that will make the sting go away.