Sealy (NYSE: ZZ) is another one of those cheap stocks that's up big from lows achieved earlier in the year. When I say cheap, I don't mean value. I'm talking about a low-priced equity. The kind of equity that is priced below $5 per share. In the case of Sealy, its shares could be had, as of the close of trading on Tuesday, for $1.96.
But wait, you could have gotten it even cheaper in the after-hours session, because shares of the bedding manufacturer traded down to $1.82 on its Q2 report. I have to agree with the market. Although there were some positive elements contained in the release, overall, I wasn't impressed enough by the numbers to become a buyer.
The company reported, on an adjusted basis, a profit of 7 cents per share. Expectations were for 8 cents per share. Okay, so Sealy was close. And another cool part had to do with the gross margin. While gross profit on a dollar basis declined on a year-over-year basis, the gross margin increased.
Sales, however, went down by 20%. Cash flow also took a significant drop. And when you consider how the economy has been, and how the company's international operations are doing, I just don't see how I would want to buy Sealy at this stage in the current business cycle. When I look through the press release, I don't perceive there to be any solid plan by management for getting growth going again in place. Instead, the company seems distracted by making sure its financial house in order.
Don't get me wrong, the business needs to focus on such an issue. But it represents a signal to me: a signal not to buy. Sure, Sealy shares could rally further in the coming months, but I'd rather look at the company again when the fundamental situation improves. For now, Sealy just wants to tread water as best it can, and that's just not an exciting enough story for me.
Disclosure: I don't own any company mentioned; positions can change without notice.
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