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How much is a good night’s sleep worth? A lot to these stocks

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If you’re like many Americans, you probably don’t feel like you are getting enough sleep every night. In fact, some 63% of U.S. adults sleep less than the recommended seven to nine hours a night, according to the National Sleep Foundation’s Sleep Health Index. At the same time, more are recognizing the importance of catching some z’s. “What we saw in our research is this: over the last five to 10 years, increased acceptance and recognition of the importance of both sleep and mindfulness for consumers as it relates to their overall health and longevity,” said Anna Pione, a partner at McKinsey who leads the firm’s research on the future of wellness. About 50% of Americans reported wellness as a top priority in their day-to-day lives in a 2022 McKinsey survey, up from 42% in 2021. After better health, improved sleep is the next-highest priority for them, with 45% naming it a “very high priority,” according to the survey. More than a quarter said they’ll definitely place a higher priority on sleep in the next two to three years. McKinsey polled more than 2,000 U.S. consumers. There are a myriad of products in the sleep arena — from mattresses and sleep supplements to sleep apnea devices and tech wearables that track sleep. There are also studies underway looking into the impact of weight-loss drugs on improving sleep apnea. Perhaps the most obvious beneficiaries of the trend are mattress companies, which saw sales soar during the pandemic as more people focused on not only getting more z’s, but on their overall health and wellness. These days sales are down, with total units dropping 20.3% in the first half of the year and wholesale dollars sipping 10% compared with 2022, according to the International Sleep Products Association . However, Wedbush analyst Seth Basham believes the industry is bottoming. His top pick in the space is Tempur Sealy International , which he added to the firm’s best ideas list in May. The stock has already rallied 37% so far this year and hit a 52-week high on Friday. However, Basham sees more potential ahead. His price target of $55 suggests nearly 17% upside from Friday’s close. Not only is it benefiting from the overall health and wellness trend, but consumers have also been trading up, he said. That helps Tempur Sealy, which is the most recognized brand in the industry, he noted. “More consumers are willing to spend whatever it takes to get a good night’s sleep, including a great mattress to get you there,” Basham said. He also sees margin tailwinds due to lower commodity costs and a big opportunity with its proposed acquisition of Mattress Firm . TPX 5Y mountain Tempur Sealy 5-yaer performance Yet it is not just about a nice, cozy place to lay your head. Mattress companies are employing tech to help customers get better sleep. Tempur sells adjustable “smart” bases that track and analyze sleep patterns and coach consumers on how to improve. It also senses snoring and automatically adjusts the mattress. Purple Innovation and Sleep Number also have smart beds. Better sleep for health and longevity Not getting enough sleep isn’t just about feeling tired and rundown. It’s also associated with higher risks of chronic illnesses like cardiovascular disease, diabetes and obesity, according to the Centers for Disease Control and Prevention . “Sleep deprivation immediately has increased cortisol levels in people, increasing cortisol levels in people has made them more insulin resistant, making them more insulin resistant makes them more metabolically challenged, and closer to suffering from metabolic syndrome,” said Stefano Natella, head of equities at Guggenheim. Natella has studied sleep as part of his research on aging and longevity. “If you suffer from metabolic syndrome, you have a higher risk of cancer, cardiovascular issues, Alzheimer’s, so you see the whole the whole chain,” he added. However, it’s not only the amount of time spent in dreamland that can impact your health, the quality of sleep is also important. Among the studies Natella cited in his research was one that covered more than 15,000 Chinese adults aged 65 and older, including 2,794 aged 100 or older. It found that centenarians were 70% more likely to have good quality sleep than the younger cohort after adjusting for social status, education and health conditions. Treating sleep conditions Health conditions can also impact the ability to get a good night’s rest, like insomnia and sleep apnea. As many as 1 in 2 of American adults experience short-term insomnia at some point in their lives, while 1 in 10 may have long-lasting insomnia, according to the CDC . People may turn to melatonin, like Unilever ‘s Ollie or prescription medications like benzodiazepines — which include Xanax and Klonopin — and zolpidem, which includes Ambien. “So far what we have seen with sleep management drugs and things like that is they typically tend to be drugs with addictive potential,” said Guggenheim analyst Seamus Fernandez. “They have side effects and impacts on sleep quality that aren’t particularly positive.” Meanwhile, about 20% of adults around the world have moderate to severe obstructive sleep apnea, according to the American Journal of Respiratory and Critical Care Medicine . Obstructive sleep apnea causes breathing to be interrupted during sleep. The American Medical Association estimates that roughly 30 million Americans suffer from the condition, but only 6 million are diagnosed. Without treatment, people with the condition are more likely to suffer a stroke or heart attack. There are several companies that manufacture medical technology devices to address obstructive sleep apnea. ResMed , which manufactures continuous positive airway pressure (CPAP) devices to treat the condition, has an average analyst rating of overweight and more than 50% upside to the average analyst price target, according to FactSet. Several firms have noted the company’s opportunity to gain market share thanks to the 2021 recall of rival Philip’s CPAP equipment . One of those is Mizuho, which initiated coverage of the stock in April with a buy rating and $255 price target, which suggests 60% upside from Friday’s close. It estimates the U.S. addressable market at $3.5 billion, with a path to $6 billion over the next three to four years. Bank of America Securities is also bullish, noting that despite an earnings miss in August for its fiscal fourth quarter, market share gains and investments in software as a service will benefit ResMed over the longer term. Inspire Medical Systems takes a different approach and is attempting to disrupt the CPAP space by using an implantable device to monitor breathing and open the airway. Bank of America also has a buy rating on Inspire, noting that it is early days. About half of those surveyed in its obstructive sleep apnea patient survey in July said they had never heard of Inspire. Of those who did, less than 30% said they were likely or extremely likely to adopt its device. The impact of weight-loss drugs The recent surge in shares of weight-loss drug manufacturers has pressured medical device stocks . ResMed is down 23.5% so far this year, while Inspire has lost 5% year to date. Philips is actually up 46% this year, rebounding from its 59% loss in 2022 related to uncertainties tied to its product recall. Sleep apnea, which is commonly associated with obesity and overweight, can sometimes be reversed when a patient loses weight. Mounjaro manufacturer Eli Lilly is already running a study on the impact of its drug on patients with obstructive sleep apnea. LLY 1Y mountain Eli Lilly’s one-year performance “It is definitely a real value-added opportunity. It is a smart trial for them to run,” said Guggenheim’s Fernandez, who has buy ratings on both Eli Lilly and Novo Nordisk . The latter also recently said patients taking semaglutide, the active ingredient in its obesity and diabetes medicines Wegovy and Ozempic, saw a 20% decline in heart attacks and strokes . In ResMed’s latest earnings conference call in August, CEO Michael Farrell said there are three factors that will mitigate GLP-1s’ impact on the company: high cost, “incredibly low” adherence and side effects. “Look, I think it’s a long road to play out here. I think it’s, frankly, good marketing around the area of obesity and it can drive patients into the funnel. But I don’t think it’s going to be a major impact on patients because we’ve got 936 million of them worldwide,” he said. Bank of America said its survey of patients with obstructive sleep apnea found it was too early to know the impact of the new weight loss drugs like Ozempic and Mounjaro. Some 82% have not tried any them. Of those who did, only 2% said they had a large enough impact to stop using their CPAP and 26% reported a small benefit but the CPAP was still required. About 70% reported no impact, according to the survey. NVO 1Y mountain Novo Nordisk’s one-year performance That said, any positive news on sleep apnea related to GLP-1s would help move shares of both Eli Lilly and Novo Nordisk higher, given that they tend to move in “lockstep” with each other, Fernandez said. He believes Eli Lilly is about two to three years away from a clinical result. “It may be hard to imagine that it’s possible for people to get more enthusiastic about Eli Lilly and Novo, given how much the stocks have both gone up,” he said. “The reality is the more diseases and risk reduction you can prove, the more you can justify the current price of the products annually and ultimately the more patient populations these drugs can apply to over time.” The role of wearables Wearables have also been part of the wellness craze, with apps that can track fitness goals and even sleep. Garmin , Fitbit and Apple are all in the space, but it’s Apple that has the clear advantage, said tech investor Gene Munster, a partner at Deepwater Asset Management. “The wearable players out there, their market share is so small and they are going to become less and less relevant as more features are built into Apple Watch,” he said. AAPL 1Y mountain Apple While the Apple Watch is just about 6% of Apple’s overall business, it is growing, he pointed out. He sees gamifying sleep being the next step and maybe eventually integrating with mattress companies to get better sleep data. However, it’s not just about the Apple Watch improving sleep functions. The company will also get a slice of the profits of other sleeping apps that are developed and are on its operating system, said Jason Ware, chief investment officer at Albion Financial Group. Ware has held shares of Apple for over a decade. “It is an ecosystem bigger than Apple-branded apps and it can be quite lucrative,” Ware said. Blue light and beyond There are still a lot of opportunities ahead for companies looking to get into the sleep space. Sensors on mattresses and app technology will continually be improving, experts said. For Munster, he thinks the biggest opportunity is in managing blue light. “At the end of the day, sleep is so hard because people are addicted to their devices,” he said. “One area that can improve people’s ability to get to sleep is by better blue light management.” McKinsey’s study found that sleep was the area within wellness that had the greatest unmet consumer need. “Where we have a lot more room for growth is in more of the smart hardware, the monitoring tools, some of the baby sleep products, where we’ve been seeing a lot more innovation even over the last two or three or four years,” Pione said. “That’s where I think a lot of those companies have been on a much steeper, upward trajectory from a growth perspective. And there’s more kind of headroom to go there.” — CNBC’s Michael Bloom contributed reporting.

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