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.
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.
Investors should still be concerned about integration risk at Tempur Sealy, and while it’s certainly possible that industry consolidation could help the company this recovery in earnings per share is far from guaranteed. As a result it is probably best to avoid the stock at least until its quarterly earnings per share are in line with what the sell-side is forecasting for next year.
Select Comfort Corp. (NASDAQ:SCSS) can also be compared to mattress retailer Mattress Firm Holding Corp (NASDAQ:MFRM). Revenue and earnings were up at double-digit rates in the company’s most recent quarter compared to the same period in the previous fiscal year, though at a trailing P/E of 32 markets have already priced in a good deal of future growth. Analysts are bullish, with their earnings forecasts placing the stock’s valuation at 16 times forward earnings estimates and a five-year PEG ratio less than 1. Many market players are skeptical, however: according to the most recent data a sizable percentage of Mattress Firm Holding’s float is held short.
Therefore Mattress Firm holding also seems like something of a speculative pick, and investors might be best advised to hold off on mattress related companies in general. Even with the insider purchase at Select Comfort, recent financial results have not been that good and markets are already placing a good deal of hope on the combination of Tempur-Pedic and Sealy to improve industry conditions. As a result there may not be much further upside for Select Comfort based on the consolidation thesis either.
Disclosure: I own no shares of any stocks mentioned in this article.
