Shares of Tempur-Pedic ( TPX) rose 4.4% Wednesday in a down tape without any clear catalyst. What is clear is that the significant number of shorts in the Lexington, Ky.-based mattress maker find themselves in an increasingly painful position.

The company released an 8-K filing Wednesday, but analysts and market participants did not find a clear correlation between the filing and the rally.

"The 8-K does not explain the rally," says Barry Hytinen, investor relations chief at Tempur-Pedic. "The only news yesterday was that executives were granted options at a $13.47 exercise price. It's possible that some may have interpreted that as a sign that it would give these guys an incentive, but I don't think it would have pushed the stock so high."

The options, 250,000 shares to CFO Dale Williams and 350,000 to David Montgomery, president of international operations, were previously announced, Hytinen notes.

It could be that with such a high short interest, some players were forced to readjust (i.e., cover) their positions. In June, there were 19.23 million shorts in Tempur-Pedic vs. 14.63 million in May, up 31%. The short ratio, or the percentage of the free float of its shares sold short, was 22.7% last month vs. 17.3% in May.

"It's kind of crazy for this stock to have almost 20 million shares short out of nearly 85 million outstanding. Hedge funds are obviously very involved," says Joe Feshbach, founder of value investing hedge fund Joe Feshbach Partners, who has more than 10% of his $30 million portfolio inveseted in the name from the long side. "It's a deep value stock and it's surprising to find such a large short interest. I am not sure what the downside is."

Granted, the stock is down 35% from its $22.44 level of a year ago. But prices have risen 41% since the company announced a substantial repurchase program in October. Buybacks are almost always good news for investors; the stock is up 21% since Dec. 31, although was recently down 0.9% to $14.27.

Yet short-sellers have not seemed to notice.

"All hedge funds think competitive pressure will ruin this company's margins," says Feshbach. "But I don't think competitive pressure is having any impact at all."

Competitors include Sealy ( ZZ) and nonpublic companies such as Simmons and Serta. Tempur-Pedic has 7.8% of the overall market and 22% of the market share for its specialty: the production of visco-elastic foam mattresses.

Over the past year, Sealy, Simmons and Serta all have introduced visco-elastic mattresses at relatively lower prices. Short-sellers seem to be assuming the company's margins are going to come down because there is so much competition, says Mark Rupe, analyst at Ryan Beck, which does not have an investment banking relationship with Tempur-Pedic. "Yes, everybody came out with a foam bed last year, but the difference is that they don't have a brand. And brand is so important in this business."

Indeed, one strength of Tempur-Pedic is that it has established itself at the premium end of the market, with prices exceeding $1,000, notes Joel Havard, an analyst with BB&T Capital Markets, which has a banking relationship with the company. Over the past five years, Tempur-Pedic saw its revenue grow by 40% a year in average, compared with 8% for its top 10 competitors, Havard adds. "There is room for competition."

Rupe, who has an outperform rating on the stock, adds that many bears believe the foam bed is going to be a fad, like the water bed. "But this is not just a fad because unlike the water bed, foam beds have therapeutic advantages and they don't have the disadvantage or being heavy or of possibly leaking that water beds had," he says.

Feshbach believes the stock is attractively valued. The stock trades at 11.4 times this year's Street consensus earnings of $1.26. "It's one thing to short a stock trading at a 25-40 multiple. It's another to short this one," he says.

In addition, the company has a solid cash position. In 2004, it generated 14 cents per share in free cash flow and 34 cents per share last year, according to Havard. He projects a 205% increase for this year, with a free cash flow of $1.04 per share in 2006. On a dollar basis, Feshbach projects $108.1 million in free cash flow, up 174% from last year.

With cash available, the company has been able to implement a particularly aggressive buyback program. Initially, the program was originally for $180 million, but it was raised by an additional $40 million last May to $220 million. From the beginning of its repurchase program through May, the company bought in excess of 15 million shares at a total cost of $180 million. Interestingly, this initiative was not forced upon the company by any activist pressure, as is often the case. Management simply sees value in its own stock. "They will continue to buy back the stock as long as it remains cheap," predicts Feshbach.

Finally, the company posted very impressive results in its first quarter, another good point for the bulls. Sales rose by 3% to $228.6 million for the first quarter compared with a year ago. Earnings per share rose 11% to 30 cents per diluted share in the first quarter from 27 cents in the first quarter of last year.

Or the stock could have moved up simply because the company is getting further along the way of proving the skeptics wrong. Short-sellers are -- and should be -- a patient species. That would explain why the short interest in the name has not shown any sign of abating -- at least not yet.