• Research

Oct 31, 2016

S3 BLACKLIGHT: Don’t Blame The Shorts For Lumber Liquidator’s 18% Price Drop

After seeing its share price drop 74% in 2015 after a 60 Minutes report that alleged Lumber Liquidators Holdings Inc. (LL US) sold laminate flooring from China that had illegally excessive, and potentially deadly, levels of formaldehyde in it, its share price has rebounded slightly, up 6.45% as of October 28th. The firm has increased its marketing and sales efforts in order to move past their poor public image. 3rd quarter 2016 earnings did show an increase in sales to $244.1 million that beat analyst’s estimates but their net loss of -$0.68/share was much higher than last year’s -$0.31/share loss and triple analysts expected loss of -$0.19/share.

Lumber Liquidator’s short interest had been dropping for the first half of 2016, dropping $46 million, or 30%, to $106 million by mid-May. But has been climbing since then, reaching $172 million by the end of September. Since September short interest has remained steady and is $170 million today.
The main reason that short interest has stabilized is not because short sellers have maxed out their exposure to the stock but because there is very little stock left to borrow. Although only 35% of the float has been taken down, and one would expect another 15%-25% of the float would still be available to borrow, but there is only 5% to 10% of the float left. This is because there are not a huge amount of institutional holders in this stock relative to the number of retail holders. Retail holders are generally not in stock lending programs, there are several reasons for this but mainly because their stocks are fully paid for and not margined. Therefore, the percentage of Lumber Liquidator’s float which is lendable is small relative to the average security. Because of this scarcity, the cost to borrow Lumber Liquidator stock is between 3% and 4% fee, and with today’s stock price drop and increased short demand we can expect the rate to increase quickly – hitting 5% by the end of the week and climbing higher if short demand continues to increase.

Lumber Liquidators is down $3.27 today, or -18%, on 5.8 million shares of trading volume which is 8.5 times October’s average trading volume. Since short interest has been very stable for the last two weeks – it is safe to assume that today’s drop in stock price was due to long holders selling their shares and not short sellers entering the security.  The 5.8 million shares represents one fifth of Lumber Liquidators float – with so many disillusioned long holders selling their shares, short sellers are wishing they could get their hands on more stock to short.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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