Here’s an interesting company that some consider the Walmart of flooring, selling really low quality (and cheap) hardwood floors. The company has a network of around 318 Lumber Liquidators stores located throughout the United States and Canada.
From a business standpoint, it looks good on paper. The company has stellar gross margins and gets a solid 20% return on equity. The brand has grown sales, profits, and book value faster than the market and that resulted in its stock skyrocketing.
Yet, since it’s $119 high in November 2013, the stock has been falling off cliffs left and right. This is interesting since the company itself is still earning $2.31 per share ($63 million net) and has continued to grow its book value at a fairly steady pace.
So, why’s the stock down?
Over the last 18 months, the stock has built up a 34% short position in the float. One of the most vocal positions is from Whitney Tilson (Trades, Portfolio), who has published no less than a dozen articles calling attention to the company’s Chinese-made laminate. 60 minutes actually did a piece on this, probably using Tilson as a sponsor (that’s pure speculation) and that sent the stock down into the current $30 to $35 range, putting it right on my high yield investing screen.
First off, despite seeming like a nice enough guy, Tilson is not a guru investor in my opinion. He manages $59 million and has seen a rapid deterioration in the AUM (assets under management) in the last few years at T2 Partners (now Kase Capital?).
Give the guy credit though. He’s made a lot of bold calls publicly. Unfortunately, a lot of them have been bad and like Jim Cramer, he seems to be more a media head than money manager at this point.
Tilson famously said in 2004 Motley Fool article, "Google with the same market cap of McDonald's?! HA! I believe that it is virtually certain that Google's stock will be highly disappointing to investors foolish enough to participate in its overhyped offering -- you can hold me to that.”
Google is now worth four times McDonalds after a more than 1,000% rise in market value since 2004. NOTE: MCD did see a 3 fold increase over the last 10 years, if you held it.
With Lumber Liquidators (LL, Financial), he has made good money shorting it and now it’s at a price level that he’s going to be forced to start buying back or risk losing his gains. He’s short around 45,000 shares at last count and most of that was borrowed at the $100 price point.
Tilson first publicly disclosed his short position against Lumber Liquidators at a hedge fund conference in November 2013, but at the time he was not focused on the formaldehyde issue.
At this point, I think it’s only a matter of time before another guru investor steps in and takes the opposite side of the trade, especially if the company continues to pound out cash. And, definitely if the current investigations come up short with Formaldehyde And Asbestos claims (pun intended).
Just like with Bill Ackman (Trades, Portfolio) and Herbalife (HLF, Financial), the stock dropped precipitously (not as much as LL) and then Carl Icahn (Trades, Portfolio) came in and bought up 18% of the stock.
Will that happen with LL?
Maybe not with Carl, but I believe that Lumber Liquidators is a better company than Herbalife and if it gets into the 20’s (at the same earnings rate) before the next round of news, I would be a buyer.
