I wrote an article in 2015 about Lumber Liquidators when the stock had fallen from the $60’s to low $30’s per share. Then, it spent all of 2016 hovering around $15 a share, being cut in half yet again. Now, here’s where building positions matter as much as finding a great stock at a good price.
After 15 years doing deep analysis on thousands of companies across the public markets, position management is almost as important as the price you pay. In value investing, sometimes the price you pay is a falling knife. Yet, many times, that knife finds a bottom and bounces significantly higher. I think it’s fair to say that a stock bought for 10x earnings or less that continues to produce positive results will eventually be valued at 15x or greater at some point through the life-cycle, which is exactly what we’re seeing with Lumber Liquidators.
In 2015 and 2016, the company lost over $110 million, but this year it’s on track to show a profit and next year earn over $0.70 a share, which puts the forward P/E ratio at 57x. Every trader loves a turnaround story and LL is just that, but here’s where I like to think about things.
If you bought 1,000 shares at $30 in 2015 and a year later it was at $15, you could have bought 2,000 shares for the same investment. Now, with 3,000 shares and the stock at $38.88 (as of 9:46am), you’re up almost 100% on your total investment.
Just something to think about next time you’re down on a stock that you loved 50% higher.