Back in February 2012, I wrote an article on why I would be purchasing shares of Lumber Liquidators Holdings Inc (NYSE:LL) for my Roth IRA. As you can see, that has turned out to be a very profitable purchase. At one point, my initial investment had quadrupled in a little more than a year’s time.
LL Total Return Price data by YCharts.
But today, I’m offering up one big reason for deciding to sell the stock, take my gains, and invest the money elsewhere.
Concerns about product safety
Search the Internet, and you’ll find no short supply of crazy writers telling you why stock X is going to go down to zero because it’s a fraud. Usually, the authors of these pieces have a short position in the stock and their reasoning is flimsy at best.
At first blink, that’s what I thought occurred with Lumber Liquidators Holdings Inc (NYSE:LL) last week, as blogger Xuhua Zhou — who has a short position in Lumber Liquidators — wrote a negative piece on the company and its stock went down 11% over the ensuing two days.
But after taking a closer look at the allegations Zhou raised, I think this piece may have some valid points that Lumber Liquidators Holdings Inc (NYSE:LL)’ shareholders need to be aware of.
Before getting to those points, it’s worth pointing out that some of Zhou’s claims aren’t too much to worry about. For instance, he is suspicious of the company’s ability to expand margins so dramatically, but there have been significant improvements in internal efficiencies in the company. And with regards to poor customer reviews, they have been around for quite some time, and that hasn’t seemed to put too much of a damper on business.
But the claim that does concern me a great deal is that Lumber Liquidators Holdings Inc (NYSE:LL) might be selling wood — sourced from China — with illegally high levels of formaldehyde, a known carcinogen.
Lumber Liquidators Holdings Inc (NYSE:LL), on its website, claims that “All laminates and engineered flooring products sold by Lumber Liquidators are purchased from mills whose production method has been certified by a Third Party Certifier approved by the State of California to meet the CARB [California Air Resources Board] standards.”
CARB standards allow for .05 parts per million (ppm) of formaldehyde to be present in hardwood plywood.
In his article, Zhou claims to have bought a small amount of “Mayflower” brand flooring, as well as Lumber Liquidators Holdings Inc (NYSE:LL)’ popular Bellawood variety in Southern California and sent it off for testing at Berkely Analytical. Although Zhou states that the Bellawood flooring came back clean, the Mayflower brand — sourced from China — had a reading of 0.17 ppm of formaldehyde, more than three times the legal limit.