Don’t Stuff Your Cash in Mattress Stocks

by Dan Burrows | January 25, 2013 1:40 pm

Industry consolidation and an improving housing market might be helping mattress makers, but that doesn’t mean investors in this industry can rest easy.

Shares in Select Comfort (NASDAQ:SCSS[1]) pooped the bed Friday after the mattress maker missed Wall Street’s earnings estimates by a wide margin — and blew the outlook, too.

At the same time, rival Tempur-Pedic (NYSE:TPX[2]), which is buying competitor Sealy (NYSE:ZZ[3]), rallied sharply on better-than-expected bottom-line results.

But the stock still has been a dud over the longer term.

It was a reversal of direction for both companies’ stocks — at least for a day. But beyond that, they’ve both been far too volatile to let any shareholder sleep at night.

Until falling out of bed Friday, Select Comfort was the mattress stock to own, if only because it was pacing the S&P 500 over the last 52 weeks with a 13% gain.

Now, after tumbling as much as 20% in early Friday trading, Select Comfort is down about 7% for the last year.

Tempur-Pedic, meanwhile, rallied more than 13% at one point early in the session — but it’s still off about 38% over the last 52 weeks, trailing the broader market by 50 percentage points.

Yup, both stocks have been tremendously volatile — a trader’s dream and an investor’s nightmare. In just the last six months, Select Comfort has been up as much as 28% and down as far as 11%. And Tempur-Pedic may be up more than 40% over the last three months, but it was off as much as 17% as recently as mid-November.

Just have a look at the six-month performance chart for Select Comfort (green line) and Tempur-Pedic (blue line):

scss green tpx blue Don't Stuff Your Cash in Mattress Stocks[4]

Tempur-Pedic’s big Friday rally (and perhaps overall volatility) is probably due in part to heavy short interest. More than 10% of the float was sold short as of Dec. 31, meaning some of the gains are likely being driven by short covering.

Yes, management is optimistic that its acquisition of Sealy will be a transformative event for the company, but plenty of integration challenges remain. These are two very different brands, after all.

Select Comfort also has a good deal of short interest — about 9% of the float was sold short as of Dec. 31 — meaning Friday was a great day for the bears. The company not only missed Wall Street’s average earnings estimate by 10 cents a share when it released fourth-quarter results late Thursday, but it also gave a full-year outlook well below what analysts were looking for.

The bottom line is that intense competition in a sleepy industry where consumers are still reluctant to make big-ticket purchases means investors needn’t lose sleep over these names.

Mid-cap stocks are rife with opportunities[5], and there are plenty of better, less risky ideas than the mattress makers.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned industries.

Endnotes:
  1. SCSS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SCSS
  2. TPX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TPX
  3. ZZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZZ
  4. [Image]: http://investorplace.com/wp-content/uploads/2013/01/scss-green-tpx-blue.jpg
  5. Mid-cap stocks are rife with opportunities: http://investorplace.com/2012/12/go-medium-or-go-home-mid-cap-stocks/

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