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LL - Lumber Liquidators


berkshire101

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So... anyone looking at this company given the recent developments?  I don't plan on making an investment, but it might be a good case study for future references.  Company potentially harming its customers, massive lawsuits to follow, could go out of business, etc.  It's all doom and gloom from here on out.  This goes into the too hard pile for me.  But if I had the balls, I would probably dollar cost average on the way down.  Think people are overreacting. 

 

Whitney Tilson wrote a piece about them on Seeking Alpha:

http://seekingalpha.com/article/2972606-why-lumber-liquidators-wood-testing-doesnt-comply-with-carb

 

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Think people are overreacting.

 

Care to elaborate?  You laid out some of the points around why LL could easily be a zero, so I'm just curious as to how you're landing on the other side.  If you had LL laminate in your home would you be ok with leaving it be?  What do you think the cost of testing and/or removing, buying new, and reinstallation is per sq foot?  How many square feet are installed in CA?  The US?  I'm all for fishing in the crowded shorts pond for long ideas, but wouldn't touch this with someone else's very long fishing pole.

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This reminds me of when defective Chinese drywall was used by homebuilders in the early 2000s. The continuing costs for contractors who used it, for the most part unknowingly, were immense. In the drywall situation, any defect or health issue experienced by the homeowners was blamed on the drywall being present, whether it was the direct cause or not or even the specific type of drywall that caused problems. I could easily see the same thing happening here, although the effects of the flooring seem more limited than those caused by defective drywall.

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Now I know why my girlfriend left, my cat died, my canary is glowing in the dark, me left foot is shorter than the right, my manhood does not censored, my investments are dropping and my debts are rising.

 

It's all LL fault.

 

How can I sue?

 

Do I need to buy LL flooring first?

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I initiated three separate synthetic shorts on this one in each of the last three days. Luckily early in the morning on each one.

 

They have little cash on hand, the liability is immense, and the CEO acted like a kid caught with his hand in the cookie jar when interviewed.

 

Also, as someone posted in the general ideas "today" section, there could be more to this. US manufacturers are up in arms over perceived unfairness in Chinese dumping of this cheap, harmful crap on our shores. 

 

PE ratio on unadjusted earnings at $40 a share is 15. IMO, fair price for this company might be $10. But even at that price I would not touch due to all the potential liability.

 

I usually dislike shorting because of the risk/reward. Made an exception for this one. Why anyone would touch this company with even a 40 foot pole made out of titanium is beyond me. Even the short-squeeze hedgies are going to have a tough time. Because like me, many of the shorts believe they will never have to cover. Well, OK maybe at $10. Which is roughy a 10 PE on earnings that are cut in half.

 

 

 

 

 

 

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Guest roark33

I initiated three separate synthetic shorts on this one in each of the last three days. Luckily early in the morning on each one.

 

I am curious how you put on the position. Did you just buy straight puts, put spread, sells calls? 

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Two points:

 

1. How sure are you that the tests 60minutes or someone else performed were done right and the results are reliable?

2. Citron accussed Teavana of having substantially all of their tea laced with toxic substances (after having them tested in a well respect lab). Effect? Near zero, SBUX chose to continue with the transaction anyway.

 

I'd rather not make a prediction or opine on validity as I have a small long position (I believe the business idea/model can work). Time will tell. Clearly nobody would like anything suspicious in their home. Questions, I suppose, are how much effort it will take them to correct the perception created and how much of their sales where through contractors (rather than retail customers where the effect may be longer lasting, suspect contractors go on price, etc.).

 

C.

 

 

Sold calls. Now I get to lose sleep and watch like a hawk. Helps that it dropped significantly since initiated. Still nerve wracking.

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The 60m test results are published here: http://www.cbsnews.com/news/more-on-tests-used-to-investigate-lumber-liquidators/

 

I'm just following the story from the sidelines here, but test results seem legit to me, and if anything I think that the market has underreacted to the news. If you are long I hope you have a decent broker that allows you to lend out your shares: 50% borrow rate is pretty nice to receive (but - IMO - at the same time a good indication that the stock is still overvalued).

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What's the deal with the new trend in value investing where someone finds a stock in free fall and says "hey who's looking to buy? The price is down it must be good?"

 

Maybe this is a great gem.  But my own view is there really are truly terrible companies out there that just aren't worth owning at any price.  I find it ironic or perplexing that everyone on here calls out buying net-nets and low P/B stocks as outdated because the companies are too small and junky yet when a mega-cap falls 50% because of some fairly serious fraud allegations everyone is looking to pile in.  I would rather own the ignored funeral home at 50% of book rather than a lumber seller who misrepresented their products.  I guess this is the new brand of value investing.

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What's the deal with the new trend in value investing where someone finds a stock in free fall and says "hey who's looking to buy? The price is down it must be good?"

 

Maybe this is a great gem.  But my own view is there really are truly terrible companies out there that just aren't worth owning at any price.  I find it ironic or perplexing that everyone on here calls out buying net-nets and low P/B stocks as outdated because the companies are too small and junky yet when a mega-cap falls 50% because of some fairly serious fraud allegations everyone is looking to pile in.  I would rather own the ignored funeral home at 50% of book rather than a lumber seller who misrepresented their products.  I guess this is the new brand of value investing.

 

What is wrong with debating the merits of an investment on here? Is that not what the INVESTMENT IDEAS forum is made for? Cases like this make for interesting discussion, so let's discuss them, no? And as far as I know going for troubled companies is an old ass brand of value investing. You must confuse this strategy with buying "wonderful companies at a fair price", the "value" investing that's all the rage.

 

On topic of LL, it could potentially become a worthwhile investment at the right price but not nearly enough of the crap has been baked into the sp yet in my opinion, at bird's eye view it's like it went from vastly overvalued to just overvalued by the market. Plenty of space for the knife to fall.

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What's the deal with the new trend in value investing where someone finds a stock in free fall and says "hey who's looking to buy? The price is down it must be good?"

 

Maybe this is a great gem.  But my own view is there really are truly terrible companies out there that just aren't worth owning at any price.  I find it ironic or perplexing that everyone on here calls out buying net-nets and low P/B stocks as outdated because the companies are too small and junky yet when a mega-cap falls 50% because of some fairly serious fraud allegations everyone is looking to pile in.  I would rather own the ignored funeral home at 50% of book rather than a lumber seller who misrepresented their products.  I guess this is the new brand of value investing.

 

Sure I agree, discuss the merits.  But to me this seems similar to "Wow Enron fell 50%...those snakes at 60 minutes are probably working with short sellers, who's buying?"

 

There's this odd juxtaposition with buying wonderful companies at any prices and also buying companies whose business models are in danger, or are outright frauds as they fall.

 

I agree that this large cap speed bump investing is a value strategy.  Almost universally all larger value investors I talk to employ this, it's the only way to scale.  But buying an oil company during a period of industry contraction is different than buying companies in the headlines for fraud.

 

My point is just because a stock is falling doesn't make it a good investment.  It seems the trend around here is that anytime something is falling it suddenly becomes worth investigation.

 

What is wrong with debating the merits of an investment on here? Is that not what the INVESTMENT IDEAS forum is made for? Cases like this make for interesting discussion, so let's discuss them, no? And as far as I know going for troubled companies is an old ass brand of value investing. You must confuse this strategy with buying "wonderful companies at a fair price", the "value" investing that's all the rage.

 

On topic of LL, it could potentially become a worthwhile investment at the right price but not nearly enough of the crap has been baked into the sp yet in my opinion, at bird's eye view it's like it went from vastly overvalued to just overvalued by the market. Plenty of space for the knife to fall.

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But buying an oil company during a period of industry contraction is different than buying companies in the headlines for fraud.

 

I think there might be some investors who made a lot of money when FFH was targeted by short sellers. Also maybe AFSI. Also EBIX. Also HLF?

 

So there is potentially a good money to be made by buying companies accused of fraud by short sellers. There is also risk. Caveat emptor and all that.

 

My personal experiences: FFH was before I knew about it. AFSI: made some money on sideline MHNC prefs - coulda made more. EBIX - sold near bottom. HLF - not involved. Had a bunch of Chinese reverse mergers that went bust on fraud allegations. Made money on some before they collapsed, lost money on others as they collapsed. No positive stories from that area.

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Admitedly I'm talking my book but the comparisons with HLF are kinda odd. HLF may employ aggressive pyramid mlm but they don't, IMO, sell products tainted with harmful chemicals.

 

My thesis with LL is that they don't have a ton of other products that can rehabilitate their brand. Ie. "maybe their flooring is bad, but they still sell fabulous sinks." They don't sell the other stuff. They sell flooring.

 

Now, there is the nuance that it appears their cheaper product, the flooring that is not at all made of wood is the one that had the high formaldehyde content. A lot of this stuff was installed in lower end rental units. Now if I'm a landlord and I own rental units and bought some of this from LL, do I go back and try my luck with their higher end product , or do I call it a day with LL and say I will never set foot in a LL store again? My landlord friend seems to prefer option #B and I don't blame him because in the unfortunate even this turns into another scare like the mold issue some years ago, he could easily get sued. Then if he gets sued, how does he explain to a judge that he continued buying flooring at lumber liquidators?

 

LL sells a commodity product. Why on earth would someone want to buy such a product from a tainted source with tremendous liability exposure?

 

A lot of criticism of the LL shorts I read falls along the lines of, "those pansy liberals in California aren't going to tell me where to buy my flooring." Very few rebuttals on the obvious quantitative issue that this company, now incredibly tainted, is in the fight of its life and still sells at a ridiculously high PE given the current circumstances. I'm not going to-- losing enough sleep already-- but the combination of longs applying political ideology and ignoring the PE makes me want to short more!

 

 

 

 

 

 

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I've never shorted a stock before, but this does seem appealing. My concern (for shorts) is, why would the company go to great lengths to refute the 60 minutes investigation? This seems like a pretty black or white issue - either their products don't meet the standards, or they do. If they don't meet the standards, then what is the incentive of management to sign off on such an 8-k and in effect delivering lies and further digging themselves into a hole?

 

http://www.sec.gov/Archives/edgar/data/1396033/000114420415013097/v403305_8k.htm

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What's the deal with the new trend in value investing where someone finds a stock in free fall and says "hey who's looking to buy? The price is down it must be good?"

 

Maybe this is a great gem.  But my own view is there really are truly terrible companies out there that just aren't worth owning at any price.  I find it ironic or perplexing that everyone on here calls out buying net-nets and low P/B stocks as outdated because the companies are too small and junky yet when a mega-cap falls 50% because of some fairly serious fraud allegations everyone is looking to pile in.  I would rather own the ignored funeral home at 50% of book rather than a lumber seller who misrepresented their products.  I guess this is the new brand of value investing.

 

Sure I agree, discuss the merits.  But to me this seems similar to "Wow Enron fell 50%...those snakes at 60 minutes are probably working with short sellers, who's buying?"

 

There's this odd juxtaposition with buying wonderful companies at any prices and also buying companies whose business models are in danger, or are outright frauds as they fall.

 

I agree that this large cap speed bump investing is a value strategy.  Almost universally all larger value investors I talk to employ this, it's the only way to scale.  But buying an oil company during a period of industry contraction is different than buying companies in the headlines for fraud.

 

My point is just because a stock is falling doesn't make it a good investment.  It seems the trend around here is that anytime something is falling it suddenly becomes worth investigation.

 

What is wrong with debating the merits of an investment on here? Is that not what the INVESTMENT IDEAS forum is made for? Cases like this make for interesting discussion, so let's discuss them, no? And as far as I know going for troubled companies is an old ass brand of value investing. You must confuse this strategy with buying "wonderful companies at a fair price", the "value" investing that's all the rage.

 

On topic of LL, it could potentially become a worthwhile investment at the right price but not nearly enough of the crap has been baked into the sp yet in my opinion, at bird's eye view it's like it went from vastly overvalued to just overvalued by the market. Plenty of space for the knife to fall.

 

Well this can hardly be called fraud imo. They merely outsourced too cheap, that's poor controls at best, gross negligence at worst. A big hit for sure, but a far cry from Arthur Anderson.

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Mephisto - the company will always deny and dispute short accusations whether they are valid or not. No company ever admitted that shorts and their accusations are right.

 

I know. But to the extent that they said they provided other types of tests to 60 minutes that were not shown, and having the website that contradicts all the accusations with tests of their own?

 

I have no experience with frauds or shorting so excuse my naivety.

 

At this point I see what seems like damning evidence in the 60 minutes report, but also a strong defense with their safety website: http://www.lumberliquidators.com/sustainability/health-and-safety/. Guess I need to investigate further.

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Hello all,

 

I have no position here one way or another, but I see it as an interesting case study (in addition to being a very real problem either for LL customers or for the company itself depending on the accuracy of the initial accusations).

 

So out of curiosity, I pulled the CARB standards from their own website:

 

http://www.arb.ca.gov/toxics/compwood/outreach/formaldehydesop.pdf

 

However, it is not in itself complete, as it references an ASTM procedure for, among others, sample preparation. This can be bought, but not read at:

 

http://www.astm.org/DATABASE.CART/HISTORICAL/D6007-02.htm

 

However, the content of this standard can be found by googling around (I am not posting the link as it is surely copyrighted material), and a very preliminary read did not seem to mention sanding of surfaces to prepare samples.

 

I may be mistaken since I admittedly did not spend much time on this, but whether or not the surface of the sample is sanded seems to be the key difference: 60-Minutes includes it as a valid test procedure and LL's website is saying that it constitutes a deconstructive test, not valid with the CARB standard.

 

Again, absolutely no dog in this fight one way or another, and just to be clear, no association either with any of the participants involved.

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Hello all,

 

I have no position here one way or another, but I see it as an interesting case study (in addition to being a very real problem either for LL customers or for the company itself depending on the accuracy of the initial accusations).

 

So out of curiosity, I pulled the CARB standards from their own website:

 

http://www.arb.ca.gov/toxics/compwood/outreach/formaldehydesop.pdf

 

However, it is not in itself complete, as it references an ASTM procedure for, among others, sample preparation. This can be bought, but not read at:

 

http://www.astm.org/DATABASE.CART/HISTORICAL/D6007-02.htm

 

However, the content of this standard can be found by googling around (I am not posting the link as it is surely copyrighted material), and a very preliminary read did not seem to mention sanding of surfaces to prepare samples.

 

I may be mistaken since I admittedly did not spend much time on this, but whether or not the surface of the sample is sanded seems to be the key difference: 60-Minutes includes it as a valid test procedure and LL's website is saying that it constitutes a deconstructive test, not valid with the CARB standard.

 

Again, absolutely no dog in this fight one way or another, and just to be clear, no association either with any of the participants involved.

 

Thanks for the info - I will have to look into it.

 

This is exactly what I mean: the company is saying one thing and 60 minutes/shorts are saying a different thing. I don't know which one to believe over the other, and as a non-expert with these things both sides seem to make compelling cases.

 

This may turn out to be a great short either way because of the reputation damage - but that's not what I want to put money on.

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This may turn out to be a great short either way because of the reputation damage - but that's not what I want to put money on.

 

My thoughts exactly. In addition, the 60-minutes site has added information and is specifically mentioning the following: "60 Minutes also confirmed with CARB officials that this deconstructive test method is the way they test finished goods for CARB formaldehyde emissions compliance.". It then links to a different CARB document than the one I pulled, which backs up their claim:

 

http://www.cbsnews.com/news/more-on-tests-used-to-investigate-lumber-liquidators/

 

http://www.arb.ca.gov/toxics/compwood/outreach/compwood_sop_fg_decon_091313.pdf

 

So, given this and the reputation of 60-Minutes (they are not necessarily perfect, but have a whole lot to lose by playing fast and loose with the truth, in addition to surely having had to clear CBS-legal before airing), I would be very careful before investing here.

 

Still no position whatsoever.

 

EDIT: I understand where the difference between the 2 documents came from. The section of the CARB website titled "ARB Test Methods / Procedures" where I pulled the original document from also has this mention: "This page last reviewed July 13, 2012".

 

So at a minimum, it seems that the CARB website was not up-to-date. I'm not familiar enough with the applicable legislation, but I would suspect this does not absolve the company from following the up-to-date testing spec.

 

Given the information available at this point, I tend to side with the Tilson/60-Minutes. Your mileage may well vary.

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Guest roark33

I am short.  I have been selling calls and buying puts each day.  I will cover the moment LL actually makes a proactive case why they are right and CBS is wrong. It is thursday and they are still silent.  That's just bad.  After reading the results that CBS put out last night (including the actual underlying lab results), it has become even more clear that this company is probably a zero.  The liability for selling non-CARB compliant products is just back of the envelope large.  I know that's not precise in any real way, but you don't have to break out your excel to figure out that even minimal liability will bankrupt the company.  The sad thing is that the bankrupt company will provide consumers little in the way of relief. 

 

I am fairly libertarian, but here is a good case for govt regulations....

 

 

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Decided to look further into this.

 

First, I had not realized that Tilson has been short LL since late 2013 (he mentions this in the seeking alpha article linked by the OP). He originally presented the idea at the Robin Hood conference at the end of the year. Here's an updated presentation of his dated October 2014 where he raises other sourcing-related issues to explain changes in LL's margins (in addition to the current issue) which also includes his original presentation in appendix:

 

http://www.tilsonfunds.com/LL.pdf

 

A June 2013 seeking alpha article initially raised the issue that 60-Minutes expanded on in their broadcast:

 

http://seekingalpha.com/article/1513142-illegal-products-could-spell-big-trouble-at-lumber-liquidators

 

At this point, I agree with roark that this thing looks like a zero.

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