The following is from an email which Whitney Tilson sent to investors on Monday night – the email comes following a massive drop in shares of Lumber Liquidators.
Whitney Tilson On Why Lumber Liquidators (LL) Is A Zero
Following up on my email last night (below, which I only sent to a few friends at the time), in which I outlined why I think Lumber Liquidators is a zero, here are some additional comments (my own and others’):
1) In response to questions from a journalist:
[drizzle]The three funds I manage are currently short 44,676 shares of LL (a $2.3 million position based on Friday’s closing price), making it a 2.6% position (it was well over 3% before the stock got whacked last week).
I first shorted it on 10/9/13 at $102.69. My last trade was shorting more on 10/6/14 at $56.06.
I have never bought or sold options on LL – I have only shorted the common stock.
If you’re wondering why I didn’t short a lot more recently, when I knew the 60 Minutes story was going to air and would likely be very negative, the answers are:
1) It might have been illegal for me to do so (the laws around insider trading are very vague, so it’s best not to be anywhere in the gray area);
2) Even if I’d gotten a clean legal opinion, I wouldn’t be comfortable with the optics/ethics (I try to live my life keeping in mind the front-page-of-the-NYT/WSJ test); and
3) I promised 60 Minutes, once I brought the story to them, that I wouldn’t trade the stock until after the story aired (or they told me they decided not to do it).
Although the risks are less than they once were, I know from long, hard experience that if you’re a short seller and go after a company publicly, as I’ve done in this case, you should expect to be sued by the company and/or investigated by the SEC or other regulators, so I wanted to make sure there were no questions about my trading. Thus, once I got the results from the tests I commissioned on three samples of LL’s laminated wood (and the formaldehyde levels were very high), which confirmed to me that I had the story right (that LL was poisoning its own customers and knew – or should have known – this fact), I established my full (~3%) short position, gave all the information I had to 60 Minutes, and let them run with it.
2) My most recent presentation on LL, which includes slides I presented at the Robin Hood Investors Conference on 10/21/14, as well as some from my original presentation at the same conference a year earlier, is posted at: www.tilsonfunds.com/LL.pdf
3) There’s been a ton of publicity about the LL story today – here are some of the links:
- A phone interview with CNBC: http://video.cnbc.com/gallery/?video=3000358284 (4:36) andhttp://video.cnbc.com/gallery/?video=3000358449 (4:11)
- A Forbes article, Whitney Tilson Has Made $1.4 Million Shorting Lumber Liquidators:www.forbes.com/sites/nathanvardi/2015/03/02/whitney-tilson-has-made-1-4-million-shorting-lumber-liquidators
- A nice profile on TheStreet.com, Who Is Whitney Tilson? Buffett Disciple Shorts Lumber Liquidators:www.thestreet.com/story/13063898/1/who-is-whitney-tilson-buffett-disciple-shorts-lumber-liquidators.html
4) I’m sick and tired of people bashing short sellers – and I hope the 60 Minutes story helps rectify this. Yes, some short sellers do illegal and/or unethical things, but this is very rare in my experience (it’s FAR more common on the long side). In general, short sellers do much better research than long investors – they have to be much better to survive! – and, as last night’s story showed, can play a critical role in exposing wrongdoing. As we’ve seen over and over again, regulators, investors/analysts and the media are not sufficient. It was short sellers (including myself) who figured out the housing/financial crisis and tried to warn everyone. Ditto for all the China frauds, Enron, Herbalife, World Acceptance (I’m currently short the latter two) – the list goes on and on.
I can’t say it any better than my friend Chris DeMuth of Rangeley Capital in this email he sent me this morning (shared with permission):
Well done and congratulations! It was a terrific and compelling piece. The LL founder was evasive and deceptive. I replayed his comments several times. He knew.
This is an important and favorable development for short sellers. Shorting and exposing truth is not a conflict of interest – it is a confluence of interest. Ethics involves not lying/cheating/stealing; we cannot rely on the cheap substitute of listening only to people with nothing at stake. Modern investment management has often tried to rely on both thinking substitutes and ethics substitutes. Thinking substitutes such as diversification and volatility minimizing have fared poorly but have not yet been abandoned. Ethics substitutes (“listen to me because I promise that I have at no time and in no place ever even thought about doing with my own money what I now tell you to do with yours”) have fared just as badly but are still in daily use. Your 60 Minutes segment is a big step towards real morality in business and investing. Sure, you are invested in the outcome, but you are invested because your view – and the evidence you lay out – supports that outcome. That is a bigger deal than whatever ultimately happens to LL.
Finally, it serves the interest of free enterprise and free trade to have markets self-policed. Pieces such as this can protect markets from inevitable calls to have endless central planning and control. The best way to counteract the self-interest of cheaters is with the interest of short-sellers. While the government may have the resources, it never seems to have the speed to act when it counts. You have both and did something about it.
Chris DeMuth Jr.
5) Check out these two tweets to understand why the stock is a zero. Is there a judge or jury on the planet that won’t side with people like this once they understand what LL has done?
6) For more on why I believe the stock is a zero, here are some comments a lawyer sent to me:
I watched the 60 minute piece. It was riveting, damming and thorough.
I try not to appear strident and dogmatic in public utterances, but this stock will go to zero.
The assessment must be that the report is accurate and that those responsible face unlimited fraud claims, civil and criminal, with likely incarceration.
The cost of what appears to be inevitable, compelled remediation, many times the sale price of the lumber, will be astronomical.
The legal recovery theories will attack the preferences taken by the executives who have cashed out. The timing is too fast. They are toast as well.
7) With the stock just under $39, it’s STILL not cheap. Even if you assume NO impact on the company’s revenues or expenses, it’s trading at more than 14x this year’s estimates of $2.74. I could understand some folks bottom fishing this stock at, say, 5x pre-crisis earnings, but 14x?!
8) The company just released a statement that says, in part: “We believe that 60 Minutes used an improper test method in its reporting that is not included in CARB’s regulations and does not measure a product according to how it is actually used.”
This is nonsense. In fact, it’s I, 60 Minutes and others that used the correct CARB testing protocols, and it’s LL that’s using its own made-up tests. It’s a complex story, but briefly, the generally accepted and used test