I know this sounds crazy, but these two things made me money the past 2 years. A lot of money in fact. Okay, so maybe this is a bit of an exaggeration… but not really.
Let’s start with the Tigers. In 2013 Lumber Liquidators (LL) was fined for illegally sourcing lumber from a protected forest in eastern Russia that was home to the Siberian Tiger. Lumber Liquidator’s was fined $13 million dollars and received a lot of bad publicity over the deal.
In March of 2015, 60 Minutes ran a story on excessive formaldehyde in laminate flooring sold by Lumber Liquidators. LL had traded well over $100 at one point, but after the second story emerged, LL started dropping. As the company became embattled in legal fights and fines, investors fled.
The stock touched down somewhere around $10 per share at one point. I started buying it in January 2016 when it was around $15 per share. I sold PUT options on the stock each month and collected premium, occasionally being assigned the shares whenever the stock would dip in response to more bad headlines.
Why did I buy LL stock? Because although they had goofed up, I believed there was still a good company underneath. I believed that as time went on and LL paid their legal fines, folks would forget as they often do and move on to whatever the new hot topic was.
As Benjamin Graham once said “In the short term, the market is a voting machine. In the long-term it is a weighing machine”. Graham was stating that the market often reacts to news and events and the stock prices suffer. In the long-run, however, the fundamentals of the business drive the stock price.
LL eventually went up to $40 per share just last Fall and has since cooled down a bit. I sold my shares when they hit $27.50 so I left some money on the table,but I still made a significant profit on this company!
Okay, and now for diarrhea… I love Chipotle Mexican Grill (CMG)! I eat there a few times per month. Not only is it tasty, but they use fresh ingredients. I love the story of Chipotle and it’s founder Steve Ells. But Chipotle, just like Lumber Liquidators, has had their fair share of drama.
Over the last few years, Chipotle has been in the news for having several food-borne illness incidents with its customers. The news has driven the stock down. I started buying it last July (2017) and kept buying it up as recently as a few months ago. I own it at an average price of $288 per share. Today the stock is trading over $450 per share.
Just like in the case of LL, I believed there was still a good company underneath the broken stock price. Why did I think that? Well, one thing I noticed was that every time I went to a Chipotle the line was out the door. Obviously I did more analysis than just that, but my point is that there was still a good company there.
I could have been wrong about LL and CMG. I could have lost my entire investment. And by the way, this blog post is not recommending that you go buy stock in these companies! I am in no way your investment advisor!
The point I want you to take away from all of this is that there are some opportunities to make big gains off of beaten up companies that still have some life in them. The hard part is knowing if it’s something they can recover from or if it’s something that will ultimately lead the company to ruin. As investors you need to spend some time learning to read financial statements and company reports such as 10-K’s and 10-Q’s. These reports will be valuable tools in helping you to decide if a stock still has a good company underneath it.