Finding Fault With Lumber Liquidators

A nice little pick-me-up in the market today compared to Friday, although this bounce is pushing right into technical resistance. Bulls actually may want to see it hold lunchtime levels, then rest for a push tomorrow. It would have more overall strength than getting a little too extended intraday and setting up for a quick reversal tomorrow. One stock that doesn't seem like it can reverse no matter what day it is or what the action was the day before is Lumber Liquidators (LL). While the earnings report damaged the stock, the 60 Minutes report has destroyed it. The silence from the company is deafening. Sure, they've put out a couple of press releases, but they carried the weight and substance of a third-grader's report on the company. The company needs to do something bold and dramatic to halt the fall. A promo-type video or simple words saying their product is safe simply isn't enough. Management needs to prove that their product is safe, rather than just calling the testing methods used on the show into question. I'm not one for guilty until proven innocent, but their innocence is certainly called into question. The longer this drags on, even if the product is ultimately deemed safe, the more difficult it will be to repair the company's reputation and gain back business. I don't know a single person willing to shop there, regardless of price. If I were in the company's shoes, I would be setting up random sample tests for floors already installed in homes and I would enlist the California Air Resources Board to conduct the tests. The products called into question are those imported from China, so my focus would be on those. I'm sure plenty of folks with those floors in their homes would be willing to have them tested. If found safe, it may prevent them from undertaking the time and cost to replace the boards. For those thinking they can replace the floorboards and have the company pay for it, do any of us really believe it will still be around if it comes to that? I don't. The pricing of the options market does not think so, either. This is either a rocket ship or an explosion waiting to happen. The January options are looking for LL to be trading below $10 or above $50 in the next nine months. Nothing says stability like expectations for a 66% move. Denial of the report is simply not going to cut it. The market has spoken and then echoed the sentiment day after day. The company is set to provide a business update later this week and if all it does is project how dismal sales are going to be and nothing more, I doubt we'll see any recovery in shares. In fact, they will likely heading for the teens by that point, if they haven't already. Implied volatility is through the roof, which certainly has some people looking to sell puts, but I would be very careful. Instead, I would define risk with short put spreads, if that's what you desire. I have some diagonal put spreads and calendar call spreads, but the position size is currently less than 1% of my trading portfolio. Until I hear from the company later this week, I would wait and see. If I were short puts, I would define my floor somewhere or at least somewhat at this point until the news changes. Get an email alert each time I write an article for Real Money Pro. Click the +Follow next to my byline on this article.

Finding Fault With Lumber Liquidators

Even the options market is skeptical of the stock's prospects.

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