Can You Sit Back and Relax If You Hold These Stocks?

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

You'd think companies that make products we spend large amounts of time using would prove to be great investments over time. In many cases, you'd be right—but not always. The wide range in the performance of these companies' stocks suggests that the oft-repeated investment maxim about buying what you love might not work as well as it sounds. Let's compare La-Z-Boy (NYSE: LZB) and Tempur-Pedic (NYSE: TPX), which are best known for their recliners and memory foam mattresses, respectively. We'll compare both companies against a third, Select Comfort (NASDAQ: SCSS), the manufacturer and marketer of the Sleep Number bed.

All three, but especially Select Comfort, depend heavily on one product marketed to the masses. Their degree of specialization differentiates them from that of Ethan Allen (NYSE: ETH), which carries a wider range of merchandise yet markets its wares in the same fashion, through showrooms offering personalized service.

Over the last year, Tempur-Pedic has shed almost half of its market cap. Meanwhile, La-Z-Boy and Select Comfort have trounced the market. But if it goes through, Tempur-Pedic's proposed acquisition of Sealy (NYSE: ZZ) for $2.20 per share will have a major impact on the company's fortunes. On the plus side, the company post-merger would have better pricing power and, as management consultants like to say, could realize savings through synergy. On the flip side, the company will be taking on debt and, most likely, sacrificing margins in the short term as it begins selling lower-priced traditional mattresses.

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LZB data by YCharts

But What about the Long Term?

Despite recent trends, La-Z-Boy hasn't performed as well as Tempur-Pedic, and its stock price has fluctuated more wildly. The company hit especially strong turbulence between April 2002, when La-Z-Boy traded at $30.04, and February 2009, when it fell to a low of $0.90. For those seven years, its graph resembled one of the company's recliners during football season.

Tempur-Pedic and Select Comfort did far better, although their stocks didn't enjoy much of a soft landing during the worst of the real estate crisis. From an IPO price of $14 in December 2003, Tempur-Pedix sank to an all-time low of $4.46 in March 2009. Similarly, SCSS was trading below $1 during that timeframe. 

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LZB data by YCharts

The Bottom Line

Based on the fundamentals:

La-Z-Boy is pricey, given the stagnant nature of its business and its high price-to-earnings ratio of 18. Its past performance doesn't engender much confidence;Nor does its beta of 2.56. (the market, by definition, has a beta of 1.00.)

Select Comfort appears overpriced, despite its low levels of debt and terrific return on equity. Keep in mind how similar it is to Tempur-Pedic, which started its descent in June upon an earnings warning, and that it has a beta of 1.99.

Tempur-Pedic is an attractive option in the home furnishings industry. With a beta of 1.74, it is volatile, though. There's also a lot of uncertainty associated with its acquisition.

The Bigger Picture

So what are the lessons to be learned by studying La-Z-Boy and Tempur-Pedic? Well, when choosing stocks you have to consider how long you intend to hold them. Second of all, over the long term lower-beta stocks outperform high-beta stocks. We observe this pattern not only when we compare Tempur-Pedic and Select Comfort to La-Z-Boy, but also when we compare Warren Buffett's results to those of most mutual funds.  And most importantly, we learn not to overlook sleepy companies with boring products, because they can be cash cows too.

whywalkrandomly has no positions in the stocks mentioned above. The Motley Fool owns shares of Tempur-Pedic International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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