In case you missed it, Lumber Liquidators (LL) was featured in a VERY negative light on last night’s 60 Minutes program on CBS, with not only short sellers suggesting massive fraud by the company, but 60 Minutes investigators arriving at similar conclusions, watch here.
A year ago I took a look at LL prior to their Q4’13 results (here). This was my first and last blush take on the company:
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What struck me at the time was that this was supposed to be a margin story yet it seemed by their advertising they were much more interested in volume/market share than profit margins. I had never been to a Lumber Liquidators but CC had done some flooring shopping at the time following the Boulder floods and had been to one. He thought they were sketchy and never went back. It also struck me as odd at the time that despite some very prominent focus from the short side:
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.
There were some pretty savvy hedge funds listed as top holders on the long side:
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:
As of the last 13F filing Lone Pine still has an 8% stake, and SAC, now Point72, has raised its stake, per Bloomberg:
The stock is trading down $14, or 25% in the pre-market, this after declining nearly 25% last week after the company’s acknowledgement of the impending 60 minutes piece. Prior to the company’s results last week I chose to avoid the name all together (here):
with no strong view on the company’s fundamentals, but cognizant of the positive tone and results of housing related stocks today, I would suggest it would be hard to step in front of this one as the 26% short interest could fuel a massive short squeeze on a beat and raise. That said the 21% one day decline in July on their earnings warning is a reminder of the fact that sometimes the shorts get it right.
The last point is the most important take-away, sometimes the shorts get it right, even in a raging bull market.
I would add that there was some interesting put activity in the stock leading up to last week’s dramatic turn of events:
Feb 10th: large opening blocks of March 50 and 55 puts bought to open, and 1,000 of the May 55 puts. there was also closing selling of 2000 Feb 55 puts, it appears the trader rolled this bearish view out (when the stock was around $63.70).
Feb 12th: look like at least one trader closing out of March 60 puts and rolling into May 60 puts.This is the sort of activity we would normally see in front of a potentially volatile event like earnings, for a company who’s stock has been very volatile in and around earnings, July 10th stock declined 21% after an earnings warning, and saw its stock cut in half from the 52 week highs in 2014 (when the stock was around $63.50).
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So for the Feb 10 and 12 I would say kind of normal pre-earnings action, definitely institutional, but in hindsight very well timed (and chunky for what was then a nearly $2 bill market cap co).
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But the eyebrow raising activity came in January, largely due to the size of the trade:
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Jan 22nd I highlighted (here) a very large put roll from Feb to March (which Doc mentioned) increased put implied volatility:
LL – saw a good size bearish roll when the stock was 56.51, a trader sold to close 15,000 Feb 60 puts at 7.50 to close and bought 15,000 March 60 puts for 10.30 to open. The company has not set its reporting date, but Bloomberg estimates Feb 19th. LL is down 14. 5% so far in 2015, but still up 13% or so from the 52 week lows made in Sept 2014 just below $ 50. The stock had a massive day, closing up 7.5%, I suppose the 22% short interest doesn’t hurt on rally days like yesterday.
This trade stands out because of the size of contracts and the considerable premium committed.
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The main takeaway from the put activity is that one of those hedge fund longs were either very worried about their holding in the coming weeks/months, or a speculator was fairly convicted that the stock would be testing the 52 week lows in the near future.
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Does this suggest anyone know something they shouldn’t have? I have no idea. I do not know the insider trading laws as they relate to activist investors, but if the short seller who was interviewed for the 60 minutes piece spread the news prior, then I would guess this is something that regulators would not take kindly to. But the big question is whether or not the short seller could himself add to his position knowing that he is participating in the very story that could be the beginning of the end for the company? I suspect he can, we have seen it with Bill Ackman in Herbalife (HLF) and again with his involvement in Allergan/Valeant.
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There will always be those in the know, and if my experience in the markets as a professional trader can attest, for the most part we (me and you) will not be In The Know and that’s probably a good thing. Sometimes the difference between being a billionaire and doing time in Club Fed is binary.
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