Many people toss and turn each night. They’re restless. They can’t sleep. Or maybe they snore or wake up constantly. Is this you or someone you know?

Sleep consumes about one-third of our lives, yet an estimated 70 million Americans suffer from some kind of sleep-disordered breathing (SDB), of which 40 million are diagnosed with chronic problems. The cumulative effects can be attributed to health problems such as an increased risk of hypertension, diabetes, obesity, depression, heart attack and stroke. It’s estimated that sleep deprivation accounts for an annual $18 billion in lost workplace productivity, according to the National Sleep Foundation.#-ad_banner-#

But despite the increasing understanding of the health problems derived from sleep disorders, very little is done about their treatment and prevention. In fact, up to 90% of Americans who have obstructive sleep apnea or other types of SDB remain undiagnosed and untreated, according to the Washington University School of Medicine. This discrepancy has created one of the fastest-growing segments in the respiratory device industry. 

Clearly, there’s a huge market opportunity in this niche segment of the health care industry, and the company that can conquer this under-penetrated market, will likely make a lot of money. 

In fact, I know one such company, and it’s been hard at work developing new devices for patients with SDB. Its product portfolio consists of airflow generators, nasal masks and pillows that introduce the airflow needed to prop open respiratory pathways during sleep. In addition, it’s a market leader, with distribution capabilities in more than 70 countries through wholly-owned and independent companies. 

With a $5.4 billion market cap, the stock has grown at an impressive pace since 2009. And I think this trend can continue for many years to come.

The company: Australia-based firm ResMed (NYSE: RMD).

There are three major trends that could provide a pathway for explosive growth for this stock:

1. There is a large, underserved market of individuals with breathing/sleep-disorders, and the company incorporates noninvasive treatments into sleeping patterns.

2. Major innovations have taken brought more awareness about the topic, which is driving more patients to discuss treatment options with physicians.

3. At-home sleep-apnea testing could explode at any time, opening up new markets for those who do not want to dedicate the time and money required for testing in a sleep lab. This trend could greatly benefit the products of this leading treatment provider.

Strong sales + new patents = huge growth prospects
ResMed generates about half of its sales in the United States, while the other half is dispersed primarily throughout Europe, Japan and Australia. ResMed posted $349 million in revenue in the first three months of the year, up 11.5% from the same period last year. More important, the company is extremely commited in keeping its new-product pipeline fresh. Not only does it invest about 7% of revenue in research and development efforts, but it also holds more than 3,000 patents granted or pending worldwide. Combine this with the large number of undiagnosed patients, and the stock looks positioned to grow at a substantial rate during the next five years.

Looking at demographic trends, ResMed’s products are likely to be in high demand during the next decade, as a result of the increased aging population and rate of obesity. I think 10% compound annual sales growth is a conservative projection, as awareness increases and more convenient testing options become available. 

Risks to Consider: Many health insurance companies are not willing to pay for sleep-disorder treatments. If ResMed receives lower reimbursement rates for its products, then it could impair revenue and margin potential. Additionally, about 7% of ResMed’s revenue is allocated toward research and development. If it is unable to introduce new products in the future, sales and margins could also suffer.

Action to Take –> Buy ResMed (NYSE: RMD) up to $40 a share. This company has tremendous upside potential with sleep-deprived patients and investors alike. It has produced annual gains in excess of 20% annualized during the past 15 years, and I could see this stock hitting $50 a share by the end of 2013.