Don’t Think; Don’t Worry; Just Sleep – We’ll Take Care of The Rest (SNBR)

Today we get out of bed and jump straight into the arms of somnambulant specialists Sleep Number Corp. (NASDAQ:SNBR), makers of beds, bedding, and all else that contributes to a superior circadian dormancy.

The company has a 22 year history as a listed stock, the first twenty of which saw the shares average just $20.

Then the Batflu struck!

Last March shareholders waved bye-bye to $20 and watched the stock climb to an all-time high of $133 – struck just last Friday.

As you can imagine, we find it difficult to conceive that such a move will be lasting, particularly as the competition in the mattress field is anything but lethargic, and the current bullish insomnia is not slated to last much longer.

Basic Accounting

Fundamentally, we believe, the stock is now headed for some shuteye.

To wit –

• P/E is 36.86,
• Dividend yield is zilch,
• P/B is a big donut, while
• A huge short float of 11.91% (short ratio of 7.93) makes the trade a more complicated proposition.

The company delivers earnings this Wednesday, but even in a best case scenario, we can’t imagine a report that would jack the share price for more than an hour or two.

Stock’s way too overbought.

As the chart below shows, both daily and weekly RSI signals are excessive , a development that normally shoots bolts of anxiety through the legs of fund managers.

We, too, get a chill of the jiminys when we see it.

Take a peek (in green, at bottom) –

Technically…

1. Price is near parabolic after a year of unimpeded gains (in red) that lifted the share price by some 800% – 80% of which was earned in just the last six weeks.
2. That also pulled price almost 200% above her long-term moving averages, a decidedly stretched reading (in black).
3. Monthly RSI (not shown here) is also 80+ overbought.

In short, it’s a perfect Rip Van Winkle sequel-in-the-making.

Put this puppy to bed.

For. A. Long. Time.

Like this…

A Jew and His Money recommends your consider selling the SNBR June 18^th 170 CALL for $6.20 and buying the SNBR June 18^th 95 PUT for the same price.  Net Zero premium is the result.

Rationale: SNBR options are priced for a fall.  That is, short CALL spreads are offering negative premium and PUT spreads for five points cost more than $5.00 to purchase!

In short, the prices themselves reveal a manifestly negative bias.

That said, we can overcome those obstacles by setting a synthetic short with split strikes – and very widely split, at that.

The move required to profit is not so wide as the strikes, either.  As the share price declines, the PUT will grow in value commensurate with the loss in value of the CALL.  Therefore, we don’t require a minimum move to SNBR 95 to cash in.

Maximum gain on the trade is unlimited.

Maximum loss on the trade – with a STOP buy order in place at 170 – is NIL.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew