Being a shareholder in Trans World Entertainment (NASDAQ: TWMC) hasn't been a lot of fun for the past decade or so. The company is the leader in mall-based music sales but, as you can imagine, iTunes and Wal-Mart (NYSE: WMT) have made that market position into a Pyrrhic victory.

Founder and CEO Robert Higgins withdrew his $5-per share takeover offer back in May, citing the poor credit market, and a $7-per share offer from a fund calling itself Sherwood Investments mysteriously evaporated. Now the stock is down in the $2.50 per share range and, with no going-private deals on the horizon, the company is making a last ditch effort to execute some kind of turnaround that might restore some modicum of shareholder value.

The company is in the process of rebranding all of its stores under the f.y.e. label, and is also embarking on an ambitious ad campaign featuring R&B star Ne-Yo and WWE star Batista in television commercials. The Business Review reports:

In one 30-second commercial, Batista and another WWE wrestler, MVP, drop-kick and body-slam each other in what seems like an impromptu fight inside an f.y.e. mall store. Bass-thumping rock music blares as fans cheer from outside the roll-down security gate.

In the other spot, teenage girls at an f.y.e. realize the chart-topping singer Ne-Yo is wearing headphones in the store, singing aloud to himself a cut from his yet-be-released album, "Year of the Gentleman."

MGL Asset Management Group's press release purporting to offer $7.25 per share for Krispy Kreme Doughnuts (NYSE: KKD) was pretty quickly debunked as illegitimate and, very probably, an effort to hype the stock for a quick buck. Jon Ogg reported on the mysterious offer on our sister site, BloggingBuyouts.

The stock jumped on the news of the offer, but quickly gave up all the gains and then some after media and analyst reports dismissed the offer. But anyone who jumped on the stock at the sight of the press release got burned.

How can you prevent this from happening to you? A good rule of thumb: When you're looking for information on material developments, look to the SEC filings. The offer was made solely through a press release -- something that anyone with a few hundred bucks to pay the wire fee could send into the hands of millions of investors in a few minutes. Until you see something about the "offer" in the SEC's Edgar Database, it should be regarded as a rumor. I wrote about a similarly non-materializing offer at Trans World Entertainment (NASDAQ: TWMC) back in November.

Another solution is to leave the "in-play" trading to the pros -- it's all about information and you're unlikely to have an edge. If you see a news item that a company has received an offer, don't jump in.

CNBC reports that the video game industry is making progress in its efforts to offer downloads of high-quality games over the internet. Nintendo has introduced WiiWare, which lets users download games for the Wii from independent publishers. Developers set the price -- far cheaper than the high-budget games put out by the big publishers -- and Nintendo takes a chunk of the revenue. CNBC adds that "Digital delivery of all forms of entertainment is widely considered to be a foregone conclusion. Only the timeframe is in question. Not only will publishers have to learn to adapt, but game retailers such as Gamestop (NASDAQ: GME) will have to figure out how to compete directly with companies that are also clients."

What happens if the downloading trend takes off as most experts assume it will? The story of Trans World Entertainment (NASDAQ: TWMC) could be a harbinger of things to come if Gamestop is unable to adapt. As the number-one operator of mall-based CD stores, Trans World has seen its sales and profitability plummet -- the shares have declined from over $13.00 in 2005 to the current price of $2.60. The market was very late in pricing in the disastrous effects that the MP3 would have on the brick-and-mortar industry.

Maybe Gamestop can adapt. But with a P/E ratio of over 30 for a company whose business model will have to change drastically over the course of the next decade, investors may want to keep in mind the collapse of Trans World Entertainment.

Trans World Entertainment (NASDAQ: TWMC), owner of mall-based entertainment stores Fye, Coconuts, Strawberries, and Suncoast (among others), reported a 6% decline in its sales for the holiday season due, once again, to continued weakness in CD sales and competition from downloading. The company also revised their fiscal year earnings estimates from 10-20 cents a share down to 0-5 cents. Ouch!

The sales were another disappointment for TWMC and its shareholders, as the shares have declined from over 14 dollars per share in early 2005 to their current price of $6.14, after today's 7% drop.

Breaking down the results, music sales were down about 12% and video sales were down 2%. Video games sales were up 6%, but this couldn't halt a 6% decline overall. They had previously been anticipating a low single-digit gain in comparable store sales. To listen to their conference call for the holiday season, visit their website.

If there's one thing that you have to admire about TWMC, it's their commitment to their industry. In the face of declining sales and profitability, they purchased the Musicland chain out of bankruptcy and recently were outbid in their effort to purchase Tower Records out of bankruptcy. While the move was brave, the increased debt load and lack of profitability has made TWMC a far less attractive potential acquisition target than it may have once been.

Should investors invest in TWMC? I don't know. But it may be an illustration of an important rule for investors: valuation matters. Just because the business is in decline doesn't mean the stock is a sell. With a price-book ratio of slight over half, TWMC has all the hallmarks of a classic contrarian stock: extremely negative sentiment about the business, huge decline in recent years, and very low price to book and price to sales ratios. The success of this stock will depend on management: will they be successful in shifting Trans World from a mall-based music store into an "entertainment destination," as they've talked about in conference calls?