Are The Lumber Liquidators Reports A Hedge Fund Bet For Success?

Even with Lumber Liquidators being investigated for improprieties, some believe that the negative reports are the workings of hedge fund owners, using leverage to maximize the hedge fund owner’s profit while the company being leveraged misses the intended profit level.

Forbes is reporting that Whitney Tilson, the originator of the hedge fund dealing with Lumber Liquidators, appeared on the CBS News show 60 Minutes to expose Lumber Liquidators’ wrongdoings, specifically using excessive amounts of formaldehyde that goes beyond California minimum standards in the production of their laminated flooring, made in China. Currently, the California Air Resource Board (CARB) is testing different samples from around the nation to verify this contention.

“I’ve seen hundreds of companies do all sorts of bad things to get their stock prices up,” Tilson said, “but this has got to be the worst.”

Thus far, Tilson’s efforts have garnered him a profit of nearly $1.4 million. His hedge fund efforts began in October of 2013. In November of 2014, Tilson received a tip about the factories in China using tainted formaldehyde, and announced his intentions to start a hedge fund against Lumber Liquidators that same month.

Kase Capital portfolio is currently short 44,676 shares of the flooring giant. On October 2013, shares of Lumber Liquidators were selling at $102.69. One year later, after Tilson had built his short strategy, shares were down to $70, with the lowest level being $56 per share.

Since the 60 Minutes report, however, shares of Lumber Liquidators have shrunk by 40 percent, reaching a low of $38.83 per share.

The New York Post is reporting that CARB has tested samples of flooring from different states in the nation, and have found excessive amounts of formaldehyde in all but one case. To keep confidentiality, CARB would not say what states the laminated floor covering were purchased in. Formaldehyde is recognized by the state of California as a known carcinogen.

If Lumber Liquidators are found to be non-compliant, they could be fined by CARB $1,000 for each day they sold the contaminated flooring.

There is a fear that some contaminated flooring that has already been sold has 20 times the California-allowed levels of formaldehyde. There is no word on any flooring recalls at this point.

The original point of contention, however, was the source of the wood for the flooring. Many believed the company was using wood from an off-limits Russian forest, thus further endangering Siberian Tigers.

If, as many believe, the stock goes to zero, Tilson stands to make $3 million from his hedge fund efforts. Many feel the company cannot recover from all of the potential lawsuits from those who have already purchased and gotten sick.

[Image courtesy of Wall St. Mavens]