My industry source on the recent turmoil at Lumber Liquidators; Another reason to avoid Icahn Enterprises' stock; More on Costco Wholesale's high valuation; Reopening the doors to Stansberry Research's incredible investment breakthrough

1) I have a long history with Lumber Liquidators – now known as LL Flooring (LLFLQ) – so I'm still interested in seeing developments with the company and the stock.

I'll discuss the latest news – a recent bankruptcy filing and some last-minute corporate maneuvering – shortly via my industry source, but I'll give some brief context for my history with LL first...

In 2013, thanks to a tip from one of my readers, I discovered that the then-high-flying company was sourcing toxic Chinese-made laminate flooring and poisoning its customers with dangerous levels of formaldehyde, a known carcinogen.

I pitched it as my favorite short position at the Robin Hood Investors Conference on November 22, 2013, the day the stock peaked at $115 per share (you can see my slides right here, and I also showed two minutes of clips from this video: Liquidating the Forests).

Later, I brought the story to 60 Minutes, which aired a segment on March 1, 2015 in which I was featured. It was an incredible piece of investigative journalism that exposed what the company was doing (click here to watch it). Over the following months, the stock eventually crashed to around $11 per share, and I closed out my position.

It was a good decision... The stock later rallied to above $40 per share in late 2017 and, after another crash, back to above $30 per share as recently as early 2021. You can see the moves in this 10-year stock chart:

But since early 2021, it has been downhill for LL – all the way to a bankruptcy filing.

Take a look at the company's revenues and profits over the past decade and you'll see why – after a pandemic-driven surge in profits in 2020 and 2021, it began losing money in mid-2022 and never recovered:

How and why did this happen? To answer that question, I turned to my longtime friend Donovan Royal...

I first met Donovan when he reached out after seeing the 60 Minutes segment. He was an industry veteran who ran a handful of flooring stores in Texas that competed with LL. He quickly became my best source on the company and industry – all the way to the present.

So when I saw that LL filed for bankruptcy, I asked if Donovan would write up his observations and allow me to share them with my readers. He was kind enough to say yes, and began:

The days of LL as a publicly traded entity are coming to an end. Last month the company filed for chapter 11 bankruptcy protection, and at the end of August announced it would pivot to a full liquidation.

However, in some last-minute maneuvering, the founder, Tom Sullivan, made an offer to acquire 219 of the company's 430 remaining stores. On Friday, after almost two years of rejecting multiple offers to acquire the company at above-market prices, LL's lawyers filed an asset purchase agreement accepting Sullivan's offer, detailing total consideration of: a) $1 million; b) 57 cents on the dollar for the inventory at those 219 stores and at one of the company's three distribution centers; and c) the assumption of certain liabilities.

So, subject to court approval, it looks like Sullivan will finally get his company back (or at least half of it).

Donovan explains the many reasons that sales and profits declined:

Over the last couple of years, LL has seen double-digit sales declines due to a range of factors:

• A failed strategy shift;
• A questionable re-brand from Lumber Liquidators to LL Flooring that didn't resonate with customers;
• A tough macro environment due to a recession in the housing market we're experiencing right now; and
• An inept management team that failed to cut costs and kept opening stores, even as same-store sales turned increasingly negative.

Still, shareholders could have been OK... but the board sank them, as Donovan argues:

Unbelievably, the board rejected offers as high as $8 per share in early 2023 and as recently as April 2024 failed to consummate an acquisition offer for $2.50.

Then, as the company was running out of cash just a couple of months ago, instead of acknowledging its mistakes, the board doubled down and fought with its founder, Sullivan, in an effort to keep him and two other nominees off the board.

In July, almost two months after it should have held the annual general meeting, shareholders rejected the board's candidates and resoundingly voted in favor of Sullivan's slate. But by then it was too late...

The failure of the board to preserve value for shareholders when multiple suitors showed interest, instead squandering valuable months and shareholder resources fighting a proxy contest, paying scores of consultants, and delaying selling its valuable Virginia distribution center, have led many to believe that it put insider interests ahead of fiduciary duties. The board's actions will no doubt be heavily scrutinized in what I am sure will be several shareholder lawsuits in the coming years.

Regarding the stock, which is trading for $0.02 on the pink sheets, Donovan (who owns it) comments:

It remains to be seen if there will be any residual value for shareholders. When the company filed for bankruptcy, its assets exceeded liabilities by $84 million. The aforementioned sale of the Virgina distribution center will bring in an additional $105 million. The company also listed $248 million in inventory as of the end of the first quarter. LL is currently conducting liquidation sales (the irony is not lost on me especially as the signs are bright yellow!) at its remaining 211 stores, with the first tranche scheduled to be completed in two weeks and the second tranche of stores shuttering for good in November.

Most people may think these sales will yield pennies on the dollar, as is usually the case for clothes, toys or books, but flooring is different. When I was in the industry, I never once sold any kind of flooring below landed cost, not even in a store liquidation context.

Of course, there will still be some overhead, salaries, lawyers, bankers, and consultants to pay, but the deal with Sullivan will substantially reduce ongoing expenses and bring in more than $66 million.

So while it's rare for shareholders to see a dime in bankruptcy, I'm not ruling it out.

Thank you, Donovan!

This is a good case study of a classic value trap...

The financials showed a company heading toward bankruptcy, but at every step along the way, the stock looked cheap because the company could have turned itself around under new management or, failing that, sold itself for a substantial premium.

In this case, investors should have paid attention to the financials – which is why I always start my analysis of every company there.

2) Speaking of value traps, I've warned my readers a dozen times (archive here) about Icahn Enterprises (IEP), which continues to sink for reasons outlined in this insightful New York Times article from last week: Wall Street Is Worried About Carl Icahn. Excerpt:

Mr. Icahn is under intense scrutiny from Wall Street investors, who are rapidly selling his company's stock. In the past year and a half, shares of Icahn Enterprises, his publicly traded investment company, have dropped more than 75 percent, losing nearly $20 billion of value. After dropping more than 30 percent since mid-August alone, it now trades at $10.53 a share, its lowest level in more than two decades.

Mr. Icahn owns roughly 86 percent of the shares, so he has personally lost about $17 billion....

Some Wall Street investors are now worried that the stock's continuing fall could threaten the health of the entire company and that it could be forced to sell companies it holds.

Continue to avoid this stock like the plague.

There's no price at which IEP is a buy because of the potential for a "death spiral," in which a declining stock price triggers margin calls for Icahn (who owns about 86% of the shares) and forced selling (either by Icahn or his bankers) into a market with few buyers.

3) While the opposite of a value trap, in my August 13 e-mail I warned my readers about Costco Wholesale's (COST) stock due to its extreme valuation.

This Wall Street Journal Heard on the Street column from last week makes this exact point: One Bargain You Can't Find at Costco Is Its Stock – Does That Matter? Excerpt:

Investors love Costco so much they'll pay more for it than Nvidia. But even famed investor Charlie Munger might balk at his favorite retailer's earnings multiple today.

In an interview last year, Warren Buffett's late right-hand man observed that the "trouble with Costco" is that the stock trades at 40 times earnings. "Except for that, it's a perfect damn company, and it has a marvelous future," he said.

Since then, Costco's valuation has expanded even further: It fetches nearly 55 times trailing-12-month earnings. That makes it the most expensive retail stock in the S&P 500 – about 60% above the industry average and 29% pricier than runner-up Amazon. Most impressive is its slight premium to red-hot chip maker Nvidia, which is expected to grow its earnings per share about three times as quickly as Costco over the next five years.

And as the column continues:

Some investors treat Munger's comments as holy writ, but read them carefully. While he has said he would never sell his Costco shares, he didn't say he would buy them at any price...

In much the way that prospective Costco members debate whether the membership fee is worth it, investors should think carefully about the company's steep sticker price. At today's prices, they might want to consider shopping elsewhere.

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Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.