This stock is trading at a discount to its IPO price and has an attractive dividend

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Defensive stocks remain in favour given pervasive global economic growth concerns, at least for the time being. Stocks that have near-term price momentum are defensive stocks such as gold and silver stocks, real estate investment trusts, telecom stocks, pipelines, and those stocks that offer attractive dividends.

Discussed below is Sleep Country Canada, a stock that is trading at a discount to its $17 initial public offering price, offers a sustainable, attractive dividend yield, and has moderate growth expectations. Management targets same-store sales growth of between 3 per cent and 6 per cent a year.

Listed below are some of the company's key attributes.

- Industry leadership. Sleep Country is the largest mattress retailer in Canada with its two banners, Sleep Country Canada and Dormez-vous? in Quebec. In 2014, the company estimated its market share to be 23 per cent.

- Strong cash flow generation. The company is able to generate healthy cash flows given its low spending requirements. For instance, the company leases its stores, trucks, and distribution centres. In addition, management has been opening new "in-fill" stores, those in areas where they already have a market presence, including infrastructure in place. These stores are typically cash flow positive within six months. These cash flows can fund the company's growth, be used to reduce debt, and potentially increase the dividend.

- Capturing market share. People are migrating from the broader furniture retailers and department stores to buying their beds from specialty retailers. Furthermore, financial challenges at competitors such as Sears Canada may benefit Sleep Country.

- Growth. The company is aiming to add, on average, between eight and 10 stores a year. Another sales goal is to drive high margin accessory sales, such as pillows.

- Higher average unit selling prices (AUSP). The company is noticing a shift in buying habits, with people buying larger beds, and more sophisticated mattresses, with features such as pillow tops, with higher sticker prices.

- High conversion rate. The company is turning shoppers into buyers – its "conversion rate" is 59 per cent at its Sleep Country Canada stores and 57 per cent at its Dormez-vous? stores. However, management is working to improve it through store renovations, for instance, which have shown large sales increases post renovations.

- Canadian existing home sales in January rose to the highest level since 2009. When people move into new homes, it often marks a time when people consider buying a new bed.

The company will be reporting fourth-quarter results after the market closes on Feb. 24. The consensus earnings per share (EPS) estimate is 23 cents. Last quarter, the stock price soared over 14 per cent after the company reported strong third-quarter results.

Dividend policy

Sleep Country pays shareholders a quarterly dividend of 13 cents per share, or 52 cents per year, equating to an annualized dividend yield of 3 per cent.

Valuation

On a price-to-earnings (P/E) basis, the stock is trading at 14 times the 2016 consensus estimate and over 12 times the 2017 consensus forecast.

There isn't a publicly traded Canadian stock that would be directly comparable; however, a comparable U.S. company is Mattress Firm (MFRM-Nasdaq), which trades at a forward P/E multiple of 14 times the fiscal 2017 consensus estimate. Over the past few months, Mattress Firm's multiple has contracted sharply, with the stock now trading well below its three-year historical average of 22 times.

Analysts' recommendations

According to Bloomberg, there are six analysts with buy recommendations, two analysts with hold recommendations, and there is no sell recommendation. The average one-year price target is $20.64, implying a potential price return of 26 per cent over the next year.

The consensus EBITDA estimate is $68.4-million in 2015, rising 10 per cent to $75.1-million in 2016. The Street's EPS forecast is $1.09 in 2015, with earnings anticipated to advance 6 per cent to $1.15 in 2016, rising to $1.30 in 2017.

Chart watch

The stock has limited trading activity given that it was just listed in July.

Since being listed, the share price has traded in a wide range, closing at a low of $14.10 in October and at a record high of $19.94 the following month, before sliding lower.

There is technical support between $15.50 and $16, and, failing that, around $15.

There is technical resistance around $17, and then near $17.50.

The bottom line

There is seasonality in the business with lower sales typically occurring during the first and fourth quarters so I see no immediate need to accumulate shares. I would recommend accumulating shares if they dipped closer to or below $16.

I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.

The author does not personally own shares in the security mentioned in this story.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.