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Wall Street's War on Mattresses

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How do you like your mattress? I hope you like it a lot, because Wall Street doesn't think you'll ever need to buy another one.

The death of sleep
In April of this year, luxury mattress maker Select Comfort (Nasdaq: SCSS  ) was flying high, trading around $35 per share and riding the new idea that not only should sleep be comfortable, it should be healthy. Select Comfort and competitor Tempur-Pedic (Nasdaq: TPX  ) hit a wall though, when, in some crazy turn of events, other mattress companies decided to get into the premium mattress space. Sales dwindled, and supply passed demand.

It's been a quick and brutal crash for both Select Comfort and Tempur-Pedic. And when mainstream mattress maker Mattress Firm (Nasdaq: MFRM  ) told the Street that sales were worse than thought and lowered their outlook, Select Comfort shares dropped immediately. This was Tuesday, July 17, 2012. Wall Street thought no one would ever buy a mattress again.

The return of sleep
Luckily for us sleepers, Select Comfort rebelled. The company announced that not only are people still using mattresses, but they may in fact be using them more than usual.

Second-quarter earnings per share for the organization increased 50% year over year to a second-quarter record. Sales were up 27% to $205 million. The company enjoyed record operating margins at 12.6%. Management cited their vertically integrated strategy as the success behind the company's strong cash flows and ability to self-fund growth.

The "sleep number" brand is doing well, and Select Comfort is expecting to open more dealerships across the country than previously thought. Defying Wall Street, This mattress firm witnessed 14 consecutive quarters of double-digit operating profit growth.

So, why? Why was the market value of this company wiped out by 20% over the last three months? Why has Tempur-Pedic gone from a 52-week high of $87.43 to $26 today?

I can't give you an answer other than typical Mr. Market irrationality.

Conspiracy? I think not
I know, I know. It's a lot to take. When investment research firms, investment banks, and cult leader Jim Cramer have called the demise of these firms week after week, it's hard not to drink the Kool-Aid. But I've done the research. My office walls are covered with the proof. In fact, I think I'm being followed. But know this: Mattress companies are alive and well. People all across America -- heck, all across the world, are sleeping in record numbers. And when they sleep enough on their mattresses, they will go out and buy more mattresses.

The war is far from over. Select Comfort has won the battle, but watch out for more warnings from other mattress firms and Wall Street analysts. Tune in on July 24 for an earnings report from Tempur-Pedic.

Wall Street may try to dictate the way the world sleeps, but you can at least dictate the returns of your own portfolio. The Motley Fool has identified three companies, based here in the U.S., that have their eyes set on major gains at home and abroad. These companies, as reasoned in a free report, could be the brightest spots in your portfolio. Read it here.

Fool contributor Michael Lewis owns no shares of the stocks mentioned above. He does believe in aliens. The Motley Fool owns shares of Tempur-Pedic International. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (1) | Recommend This Article (3)

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  • Report this Comment On July 25, 2012, at 2:49 PM, Rick1961 wrote:

    I watch for any decent stock that takes a big hit for no real reason. I bought in to TPX at 24.44 and now I'm up 25%. Does MF try to take advantage of the knee jerk reactions to stocks by jumping on the huge dips? It doesn't always work out perfect but for the most part it's worked out well.

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Related Tickers

12/31/1969 7:00 PM
MFRM $0.00 Down +0.00 +0.00%
Mattress Firm Hold… CAPS Rating: *
SCSS $19.36 Up +0.30 +1.56%
Select Comfort CAPS Rating: *****