Can Select Comfort Stock Keep Going After Last Week's 11% Pop?

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Sometimes the difference between a good and bad report is just a matter of giving Mr. Market a night to sleep on it. Shares of Select Comfort (NASDAQ: SCSS) initially moved sharply lower after the company posted its third-quarter results shortly after Tuesday's market close. The company behind the Sleep Number adjustable air-chambered mattress opened slightly lower come Wednesday morning, only to close nearly 6% higher on the day. 

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Wednesday's turnaround was followed by upticks on Thursday and Friday, with the shares closing out the week 11% higher. Select Comfort fell short on both ends of the income statement, but a legitimate scapegoat -- hurricanes -- and the reiteration of its near- and long-term profit goals were enough to give bulls a reason to stay. A short squeeze also could've been a factor, with short interest recently at its highest level in more than a year. 

Pleasant dreams

It was a rough quarter for Select Comfort. Net sales rose 9% on the heels of expansion and positive comps, but analysts were modeling a 12% increase. Net income was flattish, and even though aggressive stock repurchases propped up profitability on a per-share basis to $0.62, Wall Street pros were forecasting $0.68 on the bottom line.

Select Comfort explained that with 13% of its store portfolio in Florida, Texas, and surrounding areas, hurricanes Harvey and Irma had a disruptive effect during the quarter. Select Comfort estimates that the catastrophic windstorms gobbled up $12 million to $15 million in lost or delayed sales during the period, and if you add that back to its results, it would've exceeded sales targets and probably profit expectations. 

Unlike Select Comfort's similarly disappointing second-quarter results three months earlier, Wall Street thinks the third-quarter miss is both temporary and excusable. Select Comfort is once again putting out its goal to earn $2.75 a share in 2019, doubling the midpoint of its profit guidance for 2017. It's narrowing its profit-per-share target for this year  -- going from $1.25 to $1.50 to a tighter range of $1.30 to $1.45 -- suggesting that the third quarter's miss will largely come back during the fourth quarter.

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A couple of analysts are buying in to the hurricane rationale. Wall Street pros at Wedbush and SunTrust responded to last week's quarterly report by jacking up their estimates for the current quarter. Others are likely to follow suit. 

A lot of people are betting on Select Comfort's stock to fall apart. There were nearly 7 million shares of the stock sold short at the end of September, much more than the 4.1 million shorted shares when the year began. When the stock didn't crash on Wednesday, it could have triggered a short squeeze, with folks scrambling to cover their bearish wagers. Select Comfort longs would take that, of course.

You don't often miss badly in a quarter, only to see the stock climb 12% over the next three trading days. Investors will want to keep an eye on the fourth quarter to make sure it captures most of the sales that Select Comfort claims it lost, but for now it's hard to bet against a stock that has nearly doubled since bottoming out 11 months ago.

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Rick Munarriz owns shares of Select Comfort. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.