I passed by a rather curious looking object at the Vancouver airport and stopped to take a look. It looked like a fancy airplane seat covered with a huge futuristic helmet. I was told that it’s the “sleep pod.” For $14, a jetlagged or tired traveler can take a nap in these sleep pods.

Arshad Chowdhury and Christopher Lindholst created the sleep pod to capitalize on America’s sleeplessness. They founded their sleep company, MetroNaps,  in 2003. Their sleep pods are now in the Empire State Building, and a few airports and universities.

Is sleep so valuable that we now have to pay for it? Think about this…nearly 100,000 car accidents are caused by sleep-deprived drivers. Forty percent of adults say their work suffers because of poor sleep. And scientific research shows that a short daytime nap actually increases cognitive performance.

Sleep, it seems, is a valuable commodity and companies are selling the promise of sleep (for fantastic profits). Lets take a look at how it all started…

For a long time, the only product the sleep industry offered was sleeping pills. Then around 2003, a few companies came out with second-generation sleeping pills. Neurocrine Biosciences (NBIX: NASDAQ) was one of them. But then Neurocrine’s marketing deal with Pfizer recently fell through sending the stock to an all-time low.

Sanofi-Aventis (SNY: NYSE), however, has had more success in the next generation sleep market. The company sells Ambien CR, a time-release sleeping pill.

Also competing in the same market is the pharmaceutical company, Sepracor Inc. (SEPR: NASDAQ) This company is the brains behind the sleeping pill Lunesta. Just take a look at Sepracor’s chart. You will see that the January 2004 bounce in stock price was due to the release of Lunesta into the market:

Another rapidly growing segment of the $20 billion sleep industry is in beds and mattresses. Select Comfort Corp. (SCSS: NASDAQ) is involved in the development, manufacture, and marketing of adjustable-firmness beds.

The company’s quarterly earnings are up 32% for the last quarter, and the stock is up nearly 68% over the last year. With reasonable valuations and a return on equity of 37.56%, investors in this sleep stock will sleep well.

Another dominant player in the mattress market is Tempur-Pedic International (TPX: NYSE). The company pioneered the use of visco elastic material in its mattresses. Its revenue has grown at a 40% clip since 2000. The stock is up 48.8% in the last year.

As retiring baby boomers seek more and more sleep aids and products, the above stocks can expect to increase their market share. In fact, it’s already showing in the stocks’ performance. Take a look at this one-year chart for Select Comfort and Tempur-Pedic:

It is fascinating that an intangible item like sleep has become such a commercial item. Intangible goods are often commercialized, packaged and sold by entrepreneurs when two things happen:

• Lesser and lesser quantities are available
• Poorer and poorer quality

That’s what has happened with sleep in today’s age. We get lesser and lesser of it and what we get is not the best quality sleep. The coming together of these two deficiencies provides innovative companies with opportunities to capitalize on the shortage. And that’s exactly what’s happening with sleep.

We are moving towards an “intangible” economy where other intangibles will soon be up for sale. If you want to figure out what the next big thing will be and invest in it, look out for the intangibles.

Regards,

Sala
September 29, 2006

The High Price of Sleep: Opportunities for an Investor was originally featured in the Penny Sleuth.