Yesterday on Real Money Pro, I discussed Lumber Liquidators (LL) and its failure to really put together a solid response from management as of yet. It finally seems a response is forthcoming on Thursday, which has the stock being bought this morning up nearly 13%. I'm not so sure this is not simply short covering or hedging, but no matter, the price today is higher than it was yesterday, for whatever reason.
A very small debate did ensue in the comments section about where to buy this one, with a few fundamental and technical arguments put forth. Granted, the buy argument wasn't a haphazard thesis overall, as it put together both recent fundamental data along with chart patterns, but the issue from my view is that LL is a haphazard stock.
Whether it is a falling knife or a parabolic short squeeze, certain stocks at specific times will lose all touch with recent reality. They begin to move in such a way that it renders traditional valuation methods, or even reality itself, as moot. For instance, how can one rely on the recent fundamentals from LL? I don't believe you can.
If there is any truth to the 60 Minutes report, then the cash on the books will be gone before an investor can even hit the sell button. The lawsuits will pile up quickly and business will cease for the most part in the stores. Even if the story isn't true, one has to expect the company will guide down expectations on Thursday for revenue and earnings, thus changing even the most recent fundamentals. Dozens of lawsuits have been filed, so expect the company to have a rise in legal costs, which will sap some of that cash. Furthermore, with the sheer massive volume in the stock, how can one rely on recent institutional ownership data? Simply put: You cannot.
While it is very possible the company has done nothing wrong and the stock is a bargain here, you can't rely on the past data to draw that conclusion. Instead, you are guessing at what future data will bring and whether the company really does have a tainted product or not. The past fundamentals mean very, very little here, and the same can be said about the charts. There is no real support if the company is guilty. And now the short interest has grown so dramatically that there is no real short-term resistance if the company is innocent.
This isn't just a Lumber Liquidators story, though. We've seen it in the past with companies who see their stock skyrocket in spite of little or young financials. Companies like GoPro (GPRO), whose stock more than doubled in a six-week period. Folks shorting along the way could make the argument the fundamentals did not merit the valuation. Technicians could argue the stock was overbought and due for a pullback. The market simply didn't care. Maybe GoPro sniffing $100 was kismet, or maybe it was just a massive short squeeze fueled by the emotions of frustration and greed.
In the end, I agree with the comments from PropDeskJunkie, who stated, "It's OK to leave them to die." In other words, you don't have to trade these just because they are making all the headlines. And if you do trade them, understand what you are trading against. In some cases, it is pure emotion, while in other cases you are anticipating a specific event and outcome. Ironically, these are times when you can't let the technicals or fundamentals cloud your judgment of the short-term outlook. Over time, one or both of those will take hold again and matter more than anything else, but during these periods when a stock breaks from "reality," they simply don't.
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