Lumber Liquidators: An All-Star Small Cap Stock

| About: Lumber Liquidators (LL)

Baseball players are now assembling in Arizona and Florida for the onset of Spring Training. They hope to make the 40 man roster. Better yet, they hope to be on the 25 man roster that is suited up on opening day.

Every general manager in baseball is doing his best to put the very best 25 men on the field as possible. They all have World Series aspirations-only one will succeed.

Halfway through the season, the regular season will pause for an annual celebration of the best players now, called the all-star game. As an investor, you have either hired a general manager or you are the general manager of your portfolio.

Your goal is probably no different than that of a baseball team's GM. You want the very best investments in your portfolio. You only have so many spots on your roster. I like to own about 25-30 stocks at a time, depending on the market.

You don't want a bunch of washed-up has beens or unproven rookies. You also want to have an all-star portfolio. You have to begin by choosing the components of your portfolio from the best asset classes now. There are a lot of asset classes to choose from.

The precious metal commercials try to convince you that Gold is the best place to be. The doomsday prophets tell you that shorting the market, shorting the dollar, or shorting interest rates is the smart thing to do. Many just say to sit on the sidelines in cash.

Let's begin our search by looking at the best asset classes now. This is the current ranking of the Asset Classes according to the Best Stocks Now App:

Data from Best Stocks Now app

This continues to be a "risk-on" market with equities leading the way. More specifically, domestic small-cap and mid-cap stocks are the best place to be right now. This has been the case for about the last twelve months. In addition to this, the almost four-year old bull market is still intact.

For your reference, these are the worst asset classes to be invested in now:

You do not want to be short the market, or invested in Cash, Precious Metals, or Bonds right now. Precious Metals have been dead money for almost one year, and the bond market looks especially vulnerable right now.

Now let's drill down to the Best Sectors in the market now:

The Best Stocks Now App ranks just over 50 different sectors on a daily basis and these are the current leaders. It should be noted that there has been very little change at the top for about the last twelve months.

As a professional money manager, I remain heavily weighted in the Building, Biotech, Consumer, and Internet Sectors. Investors can get exposure to these areas of the market through stocks, exchange traded funds, or mutual funds. I personally like individual stocks.

For your reference, these are the worst sectors now:

Now that we have determined that equities, and more specifically, small-cap stocks, along with the building and construction sector are one of the best places to be right now, let's look at an example of a Best Stock Now.

Lumber Liquidators (NYSE:LL) is a small-cap headquartered in Toano, Va. The company operates 256 flooring stores in 46 states and Canada. Their brands include Lumber Liquidators, Bellawood, and Morning Star.

While on the surface, a flooring stock may not seem very sexy, the returns are.

As you can see from the screen shot above, the stock has blown away the performance of the market over the last one, three, and five years. It was even up 17.5% in 2008 while the market was down 38.5%. Overall, the stock gets a momentum grade of "A." I cannot give the stock a long-term performance price as it does not have a ten-year track record yet.

While performance is nice, buying a stock based on performance alone makes one a momentum investor. Sorry, but I like some value along with my performance. There are plenty of quants and relative strength investors out there. I like to combine momentum with value.

Let's determine the current valuation of the stock. I begin with the consensus EPS estimate for next year and extrapolate it out with the consensus five-year growth rate. Once I have calculated that number, I choose a multiple that I think is appropriate for the stock. I take into account the industry group that the stock is in, the growth rate, and its historic valuations.

I also like to calculate a 5 year target price as opposed to a more usual 6-12 month price target. This helps me focus more on the longer term prospects for the company as opposed the short term noise.

I come up with a five year valuation of just over $116 per share. I like valuations that give me 80% or more upside potential over the next five years. Lumber Liquidators obviously meets my criteria.

When I combine performance with value I come up with a stock that ranks #48 out of just over 3,200 candidates. It earns a proprietary grade of A.

The last procedure in my stock evaluation process is a visual check of the stock chart. I use a one-year chart:

The stock recently broke out of three month base and is in a very strong uptrend. The stock is in right sector at the right time. It also passes my performance, value, and visual test. I am long the stock in many of my aggressive growth investor's accounts here at Gunderson Capital Management.

Disclosure: I am long LL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.