Not too long ago I wondered about Sherwood Investments' $7 per share bid for Trans World Entertainment (NASDAQ: TWMC). I questioned whether Sherwood was serious about its offer, but added that Julian Benscher, the man who signed the company's press releases, told me by phone that the offer was serious.

After that post was published, Benscher called me back and explained that the reason he had not acquired 5% of the company and filed a 13-D yet was that Sherwood's securities lawyer is currently traveling.

In addition, he said that his reason for stating in the press release announcing the offer that Sherwood would possibly raise its offer was that in a prior PR on TWMC, he has said he believed the company's value was higher: "We are highly confident that an auction of the company would result in a sale in excess of $8 per share, a considerable premium to your current proposal."

I'll believe that Sherwood's $7 per share offer is serious when a deal is consummated. Goldman Sachs Group, Inc. (NYSE: GS) has been shopping the company for months, it's hard to imagine another bidder emerging with a higher offer.

But until then, I think investors should take Sherwood's offer with a bucket of salt.

While the record industry continues its death-spiral, evidenced by declining share-prices of companies like TransWorld Entertainment (NASDAQ: TWMC) and Handleman (NYSE: HDL), there is at least one bright spot: Sales of Latin music are on the rise. As a big fan of contemporary Latin music, I'm going to make a confession here: I first got interested in Latin Music in 1999 when Ricky Martin sang "The Cup of Life" at the Grammys. Yeah, good stuff. I also liked Latin pop singers like Enrique Iglesias and Marc Anthony. But at the Latin Invasion faded out of mainstream American pop culture, a new breed of Latin stars are cropping up, demanding attention: groups like Bacilos and rappers like Daddy Yankee are providing edgier, more interesting music for a more mature audience.

According to Enrique Reyes of Reyes Musica, Latin Americans haven't yet become interested in downloading music, preferring the now old-fashioned CDs. While Latin music may buy some time for traditional record stores, ultimately it will move online. As Latin Americans earn more money and gain access to technology and credit cards, they too will buy their music online. As they have more money and access to the Internet, companies like iTunes and Napster will move quickly to provide them with the more obscure tracks from their native countries that they are looking for.

With the outlook for music retailers looking so bleak, might these make an interesting contrarian play? I don't think so. Handleman, which currently trades around its net current asset value, is losing money and recently eliminated its dividend. Most of its assets consist of inventory and the whole point is that CDs aren't selling. If the inventory was worth what it's listed at, they wouldn't be in trouble.

TWMC, for better or for worse, has chosen to go all-in. The operator of music retail outlets acquired Sam Goody and the Suncoast Motion Picture Company last year, and narrowly missed out on its bid to acquire the assets of Tower Records out of bankruptcy. The company is trying to refocus itself as an "Entertainment Store" and with its Mix&Burn service consumers can download songs at the store and burn them onto a CD or iPod, for a fee. Problem: Why would you go to a mall to do something you can do at home? I don't see in-store CD burning as being the future of music delivery. But I could be wrong.

I enjoy a contrarian play as much as the next guy, and music retailers certainly qualify. But while many newspapers (another interesting contrarian play) continue to generate excellent cash-flow, these music companies have stopped doing that. Perhaps this is why there has been a lot of merger and acquisitions activity surrounding newspaper companies and none to speak of around the music retailers.

The decline in the sales of compact discs has been well-documented in the media and investors in companies in the industry have suffered tremendously. Transworld Entertainment (NASDAQ:TWMC), owner of mall-music stores, has seen its stock tumble from $14 per share to its current price of $5.45 in less than two years. Handelman (NYSE:HDL), which distributes CDs to Wal-Mart, has seen a similar decline. EMI recently warned that it would report lower profits due to weaker than expected sales of Robbie Williams' (my favorite singer by the way) new album and a remix album by the Beatles.

But there is genre that is growing: country music! According to piece in the new issue of Fortune, country music sales were up 12% for 2005, compared to a staggering 29% decline in sales of urban albums and an 8% decline in alternative rock CDs. Apparently Toby Keith fans are less interested in the iPod than followers of Eminem and Green Day.

What does this mean for investors? I think that a company like Handelman, which sells at Wal-Mart, may fare considerably better than companies selling music at hipper locations. Country music is big in the red states, as is Wal-Mart. On a per capita basis, Wal-Mart is four times more concentrated in red states than in blue, according to a piece about Wal-Mart in Fortune.

However, what if country music fans are just slow to catch up with the new technology? If that's the case, those CD sales may flatten quickly and then see a decline similar to that urban music has seen in recent years. But if country music is here to say, HDL may be worth a look. The stock sports a yield of 4.73%, a price-to-book ratio of about one half. It's looking like a classic contrarian play, although value investors have been saying it's cheap for awhile; in fact, they were saying it was cheap when it was over 10. But now it really might be cheap.

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?