Name That Trade $LL: Lumber Jacked

by Dan February 18, 2014 12:09 pm • Commentary

Lumber Liquidators (LL) is a retailer that gets 100% of its sales from the U.S.  The company sells hardwood floors for home-building, and refurbishment is having a SALE, if you couldn’t tell by the company’s website:


I suspect after this morning’s U.S. February Homebuilder Sentiment reading that dropped 10 points to 46 from 56 that maybe they’ll extend the sale another day or two.

Tomorrow morning, we will get a slew of housing numbers including weekly mortgage applications, Jan housing starts and Jan building permits applications.

LL is also scheduled to report Q4 results tomorrow prior to the open.  The options market is implying a one day move of about 6.5% vs the 4 qtr avg of 5.87% and the 8 qtr avg of about 10%.

Wall Street analysts remain fairly mixed on the stock, with 7 Buy ratings, 8 Holds and 1 Sell while the avg 12 month price target sits about 25% higher than current levels at $119.    Short interest has ticked up a bit of late, nearing 20% of the float!

Options volume today and total open interest is not too revealing, despite what looks like the roll of an overwrite, with 700 of the Feb/March 100 calls trading.  Looks like the Feb was bought to close and the March sold to open.  Aside from that, puts outnumber calls 33k to 23k with the largest single lines being 5400 Feb 95 puts, 4200 May 100 puts, 3k Jan15 100 calls, 2600 May 80 puts and 2400 Mat 125 calls.

Without sounding a bit biased, the technical set up looks horrendous.  The one year chart below shows the convergence of the stock’s 50 and 200 day moving averages (purple and yellow lines) and its inability to break through that resistance. While some may see the Dec and Feb lows just below the $90 support level as a near term double bottom, the series of lower highs and lower lows since making all time highs in December could  place a break to $80 in the offing on a miss and guide-down:

LL 1yr chart from Bloomberg
LL 1yr chart from Bloomberg

There are 2 dramatic declines in the last few months worth noting. First on Nov 22nd, hedge fund manager Whitney Tilson disclosed his short bet on LL at a charity idea conference (sending the shares down 11%).  And then the second on Dec 10th the shares were down 13% as LL was hit with a class action suit with some claims about ill-gotten profits from selling illegal wood, which was one of the pillars of Tilson’s short bet.

If the recent string of weak auto sales and incentives Detroit is pushing for trucks are any indication, LL may have a difficult time offering forward earnings outlook that provides too much visibility.

All that being said, the top holders list (which was recently updated for holdings through December 31st) reads like a who’s who of massive mutual funds and smart hedge funds:


Of the list above, the ones to worry about is Lone Pine, more than doubling their stake to almost 8% of the shares outstanding, and then obviously the savvy traders from SAC, which also raised their stake but by a much smaller degree.

Keeping with the weak housing data of late and the strong likelihood of a higher rate environment in the near term, I am hard pressed to see the next few months as an optimistic time for housing related stocks.  If I were inclined to play for a breakdown on a less than rosy outlook for LL, I would consider the following options trade:

Buy the LL ($94.25) March 95/85/75 put fly for 2.25

Rationale:  This structure is profitable between 92.75 and 77.25, which encompasses most of the trading action below $95 over the past 9 months.  So it’s a cheap way for some bearish exposure given the high level of implied volatility in LL.


If you think the stock’s 20% decline since the December highs adequately discounts a weak quarter and squishy guidance, and that the increased confidence (at least as of 2013 year end) by 2 hedge fund whales are in the name for possible M&A, which would take part well above the recent highs, then I would consider the following options trade:

Buy the LL ($94.25) March 95/105/115 call fly for 2.30

Rationale:  This structure is profitable between 97.30 and 112.70.  Just like the put fly, this call fly encompasses the majority of the trading range above the $95 pivot level over the past 9 months.  The structure is nicely profitable even if the stock rallies up to the 110 resistance level, which could be tough to breach on the upside.

At the moment I am not leaning one way or the other, but the name and the set up looked pretty interesting to me and wanted to take a closer look.