Tracking hedge fund activity can be great for finding investment opportunities with tremendous upside. For this reason, it is never a bad idea to consider researching companies that have garnered significant interest from hedge funds.
Lumber Liquidators Holdings, Inc. (NYSE:LL), in particular, has received significant interest from hedge funds Lone Pine Capital and SAC Capital in recent weeks. In fact, in a recent SEC filing, both funds have disclosed significant positions in the company totaling 7.9% and 5.0%, respectively, of the total shares outstanding. Shares of Lumber Liquidators have already appreciated more than 10% since the disclosure.
Lone Pine Capital is a hedge fund managed by hedge fund manager Stephen Mandel. In the last 11 years, the fund has returned an annualized return of 23% per year. This translates to a return that beat the return of the S&P 500 index over the same period by more than 20 percentage points each year.
SAC Capital, a hedge fund managed by Steve Cohen, boasts a similar record having returned an annualized return of 30% over the last two decades. However, Steve Cohen's firm has also been surrounded by controversy over a string of recent insider trading convictions for Mathew Martoma and Michael Steinberg, former portfolio managers at SAC Capital. Despite this controversy, it is hard to deny the record of SAC Capital, especially for those looking to find prospective investment opportunities.
Considering this recent move by these prominent hedge funds into Lumber Liquidators, let's take a look at the merits of this investment opportunity and consider whether or not it suits our interests.
Founded in 1993, Lumber Liquidators is a specialty retailer of home improvement supplies and wood flooring products. The company prides itself on its vast selection of hardwood flooring supplies including laminate flooring, hardwood, vinyl flooring, cork flooring, molding, butcher blocks, accessories, and tools. Starting with just one store in January of 1996, the company has since rapidly expanded to more than 315 retail locations in North America along with more than 1,000 employees. The company continues to expand throughout North America.
Since becoming a public company in late 2007, Lumber Liquidators has proven to be in a strong growth trend. The company has experienced strong revenue growth in response to the recent housing recovery, which has sparked consistently strong top-line growth. The company has also regularly exceeded both analyst revenue and EPS forecasts.
In its most recent earnings outlook in December, LL management updated its outlook by boosting its EPS guidance to between $2.72 and $2.75. Despite being impressive, this outlook still fell short of the $2.76 that analysts had expected, thus leading to a pullback in the shares of the company. If we consider the recent EPS guidance as an anomaly, then it would be reasonable to say that the company has proven itself to be a solid growth story.
Since going public, Lumber Liquidators has shown steady growth in a number of areas including net income, revenue, comparable same-store sales, and store growth. The company also boasts strong trailing 12 months ROE and ROA margins of 27.19% and 20.24%, respectively.
Qrtly Revenue Growth (yoy)
Qrtly Earnings Growth (yoy)
Return on Equity
Return on Assets
Source: Yahoo Finance
One striking thing to note, however, is that LL has never posted a year-over-year decline in sales since becoming a public company in 2007. This is undoubtedly a notable accomplishment for the young company.
Diluted Shares Outstanding
Net Income Growth
Adapted from Marketwatch.com
With strengths in multiple areas, Lumber Liquidators appears to be a great investment opportunity for those looking for long-term capital appreciation. The company's strengths with respect to consistent revenue and EPS growth, in particular, could very well explain the hedge fund interest in this company.
However, despite the numerous strengths, it is still important to note that at its current growth trajectory any sign of slowing growth will likely lead to a sharp pullback in shares of Lumber Liquidators. For this reason I would rate LL shares to be a cautious buy, assuming that the company will continue to grow at its historical growth rate.