According to a Form 4 filed with the SEC, Michael Harrison, a member of the Board of Directors at Select Comfort Corp. (NASDAQ:SCSS), directly acquired 10,000 shares of the company’s stock recently at an average price of $22.73 per share. When restricted stock is included, Harrison now owns just over 14,000 shares of the $1.3 billion market cap mattress company and so this purchase was a significant increase in his holdings. Economic theory suggests that insiders should prefer diversifying their wealth to buying additional shares unless they are particularly confident in the company’s prospects, and studies generally show a small outperformance effect for stocks bought by insiders in line with this theory (read our analysis of studies on insider trading).
Last quarter, Select Comfort Corp. (NASDAQ:SCSS) (which owns the Sleep Number brand) saw essentially flat revenue compared to the second quarter of 2012. Because the company spent more on marketing, its net income decreased by about 40% compared to the prior year period though it should be noted that the decline was much lighter in Q1 2013. Cash flow from operations also declined somewhat in the first half of the year.
The mattress industry has struggled recently, and while Select Comfort Corp. (NASDAQ:SCSS)’s stock price is still up strongly compared to several years ago it has fallen 17% year to date against a rising market. The current valuation is 18 times trailing earnings, suggesting that the market expects profits to grow in the future despite the company’s struggles revealed in its financial reports. Investors may hope that the acquisition of Sealy by Tempur-Pedic increases consolidation and therefore pricing power. Analyst expectations for 2014 imply a forward P/E of 14.
In addition to insider trading activity, Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). Phil Gross and Robert Atchinson’s Adage Capital Management was the largest shareholder of Select Comfort Corp. (NASDAQ:SCSS) at the end of March among the filers we track, with a position of about 980,000 shares (check out Adage’s stock picks).
Following its acquisition (and name change) Tempur Sealy International Inc (NYSE:TPX) is the closest peer for Select Comfort Corp. (NASDAQ:SCSS). Adding the struggling Sealy to its business has contributed to at least a temporary hit to the company’s earnings as SGA expenses have risen sharply; operating income, in unadjusted terms, was about flat in the second quarter of 2013 versus a year earlier with interest expenses resulting in a large percentage decrease in pretax income. Wall Street analysts, however, expect it to bounce back next year and as a result the forward earnings multiple is only 12.