Pent-up Demand

I stumbled across my investing notebook recently. Given the way the market’s been recently, I haven’t been buying or selling much. But I saw my notes for Tempur-Pedic (NYSE: TPX) and got nostalgic for the glory days of early 2009.

In late 2008 the stock market decided to evacuate its bowels all over everyone’s 401(k) statements. I thought this was a good time for buying stocks. Here was my rationale:

In times of economic downturn, people tend to forgo buying luxury goods and big ticket items. So, the stock price of Tiffany’s and Harley-Davidson tend to take a downturn.

Tempur-Pedic makes mattresses of the high-end variety, so one might expect that in an economic downturn, their stock price would suffer. The graph below shows TPX’s price over the past few years. I started looking at them in late 2008, so focus your attention on the period just to the left of the ‘Buy low’ dot.

Tempur-Pedic makes great mattresses. Mattresses are one of the most boring businesses on planet Earth. Warren Buffet likes boring businesses. I like Warren Buffet.

There are only 3 or 4 big manufacturers of mattresses on Earth and Tempur-Pedic is one of them.

In a downturn, as I said, people tend to delay the purchase of big ticket items like mattresses. So, in late 2008 we saw TPX’s stock price drop from $30+ per share just a few months earlier to under $10/share. I thought that was unfair. Tempur-Pedic is a great company. They make a great product. A good night’s sleep is not a luxury.

But in late 2008 people were treating TPX’s stock like their high-end mattresses were luxury goods. The first to rise in good times and the first to drop in bad times.

I disagreed. What happens in economic downturns? People lose jobs. They sell their houses. They move.

What happens when people move? If it’s a short move, they strap their bed to the roof of the car and set off for greener pastures.

But, if it’s a long move, they buy a new mattress when they arrive at their new home. And there are only 3 or 4 big manufacturers of mattresses and Tempur-Pedic is the best among them. And many people realize that a good night’s sleep is not a luxury.

Throughout the downturn, Tempur-Pedic has been profitable. But their stock price has suffered. So, when as their stock price dropped below $10/share, and hit $7.05, I bought some.

The price fell even further in the next few weeks, to below $5, making me kick myself for buying at $7. But over the next year it rose steadily, approaching $30 again.

I sold at around $28, quadrupling my money. Had I held on a little longer, and bought at $5, I would have done even better. But I don’t have any regrets. In fact, it hurt to sell at $28. I wish I could have justified holding onto it longer. Tempur-Pedic makes great mattresses and, for a short time in the winter of 2008-2009, people treated them unfairly. But I thought that the downturn, through reduced tendency to buy and an increased tendency for people to move, would create a pent-up demand for mattresses, which would push their stock price up in the long run.

Who knows, maybe I’m completely wrong. Who knows what the future will bring for their stock price? I don’t know if they actually sold more mattresses or not. I don’t know if people actually moved more or not. Maybe I just got lucky. But I had a good run with their company and wish I could buy more at $7 a share.


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