The phrase "failure of imagination" has returned to the lexicon.
It may turn out to be an appropriate catchphrase for the just-ended
It also applies to a few situations on Wall Street, where investors
seem unable to wrap their arms around the idea that things won't
always be the way they are.
That's certainly true for
Sealy Corp. (
. The mattress maker released earnings today that reversed a
year-ago loss but reflected the country's persistent economic
doldrums. Let's face it: People don't buy pricey mattresses during
a downturn. But investors are pricing Sealy as though the company
is always going to be moving mattresses against the economic tide,
and that's not true.
For three years, Sealy -- the world's largest bedding maker, with
about a 20% share of the $6.9 billion mattress market -- posted
earnings of roughly $0.82 a share. Then the housing market fell to
pieces and, with it, Sealy's results. The company posted a nasty
fourth-quarter loss in 2008 and has struggled along since. Not all
of the furniture market was so lucky: Competitor Simmons went
But a recovery will come, even if it likely will lag housing, and
long-term investors should consider these shares not based on what
will happen in the next two quarters but what will happen in the
next two years. (Scroll down to "Stock #10" in this report
for a great way to profit from the housing
recovery.) A return to Sealy's sweet spot -- roughly $0.82 in
per-share earnings -- should propel these shares, currently trading
at less than $3.50, north of $12, their pre-financial crisis range.
Sealy shares came under intense pressure today after the company's
earnings report, which came as a disappointment. There was some
expectation in the air: Competitor
Tempur-Pedic International Inc. (
earlier this month announced better-than-expected preliminary
fourth-quarter results both in terms of revenue and earnings, and
also upped its guidance for 2010. Sealy shares had gained about
+20% since Tempur-Pedic's release. They gave it back Thursday,
however, closing down -9.7%, to $3.46, making it one of the biggest
decliners on the New York Stock Exchange.
These are not shares that look particularly great from a
balance-sheet perspective: The company has negative shareholder
equity -- liabilities exceed assets -- and that's a situation that
has persisted for years. (The gap does appear to be narrowing some,
however.) On the plus side, though, the company has a lot of cash
on hand. It's also done a better job collecting on receivables, and
it has pared inventories. The company is more than able to hunker
down and wait for a recovery.
The question, of course, is could you sleep at night if you owned
these shares? That depends entirely on your view about the future
and your goal for the trade. Short-term traders are likely to see
some valuation return after the post-earnings reactionary smoke
clears. Longer-term investors who believe in strong brands and are
confident in a recovery likely will rest easy knowing that there
shares are poised to mirror the economy's steady growth during the
next several years.
Buy Sealy when it's selling like a company that struggles to earn
two cents a share and sell it when Wall Street reprices it with a
fair value commensurate to its industry-leading position. That's a
strategy that can make any investor's dreams come true.
Editor, Government-Driven Investing
Disclosure: Andy Obermueller does not own shares of any security
mentioned in this article.
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