Lumber Liquidators Holdings Inc (LL): How To Profit From The Fiasco

wall-street-etfLawrence Meyers: The blowup in Lumber Liquidators Holdings Inc (NYSE:LL)  – as a result of allegations that it knowingly used a Chinese manufacturer to make and distribute flooring with unhealthy levels of formaldehyde – has created numerous opportunities for investors.

lumber-liquidators-fiasco

The question is: which opportunity to profit from the Lumber Liquidators fiasco is right for you?

Let’s run down all of the scenarios to see which may conform to your personal investment and risk profile.

The first and most obvious question is whether you should jump aboard with the rest of the short sellers, and short the stock here at $36, following Thursday’s 10% jump. The stock gained after the company offered a slideshow presentation and conference call.

In order to short the stock, you first have to believe that either the allegations are true and the company will be on the hook for damages from litigation, or that negative perception will remain with the company for so long that its business will materially suffer.

The stock is already down 60% from its high, so the easy money has been made. Still, there may be more downside to come.

The other side of the trade is that you believe the company’s explanations – that the products are safe, and that perception will improve over time. If you think that’s the case, then you go long.

Or you could instead look to competitors, who may see business pick up if Lumber Liquidators falls apart.

The big kahuna in the sector is probably Mohawk Industries (NYSE: MHK). Mohawk offers carpets, ceramic, laminate and wood flooring under many different names and lines.

Business is booming at Mohawk, with year-over-year EPS increases in the 20% range. The stock trading at 20 times fiscal year 2015 estimates.

Mohawk has $97 million in cash and $1.4 billion in rather expensive debt (7%), with free cash flow in the unimpressive range of $100 million to $160 million annually. While not a cash cow in that respect, it’s a “growth at a reasonable price” stock, and those have been very hard to find.

Armstrong World Industries (NYSE: AWI) is a more diversified flooring company, with three segments.

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