The most recent video from CrushTheStreet.com’s Weekly Market Wrapup series featured the recent troubles affecting Lumbar Liquidators, North America’s largest supplier of laminated wood products. After damning revelations that the company distributed inventory with unacceptably high levels of formaldehyde, its equity shares tanked, dropping 25-percent of valuation on the day after the expose. The chief executive officer of Lumbar Liquidators, Tom Sullivan, defended his company’s practices, claiming on an interview with Anderson Cooper on the 60 Minutes segment that blew the whistle on the safety breach that short traders with ulterior motives defamed his organization. While such an accusation may not be entirely ruled out, year to date, Lumbar shares are down nearly 70-percent, an astounding loss that is attributed to more than merely one bad publicity piece. Considering the scope of damage, contrarian investors may have their targets set on the home improvement supplier, but is the risk worth the reward?
The public relations nightmare that is just beginning for Lumbar Liquidators indirectly highlights the defects inherent in fundamental analysis, or the forecasting of market behavior based on the financial performance of a company. The granularities of the formaldehyde emissions testing protocol can be set aside for an elementary observation: companies lie. Even the financial statements of impeccably honest companies are only truly honest for the moment in time when the statements are made. Business is not a static entity but one that is constant motion. To determine the future trajectory of a company based solely on its four quarterly statements per year is, at best, extraordinarily difficult, if not outright impossible.
Lumbar Share Prices
Extracting market sentiment data based on a conglomeration of multiple indicators provides greater analytical depth than traditional methodologies (such as fundamental analysis) can provide. Sentiment is defined as cumulative trading behavior, which can often provide important signals regarding future market shifts. In the chart above, Lumbar share prices (on a monthly basis) are plotted against its market sentiment. Throughout the life of the stock, sentiment has been both cyclical and relatively high. However, after valuations peaked in October of 2013, sentiment has been on a freefall, hitting all-time lows. In fact, cumulative trading patterns began declining several months prior to the stock’s parabolic move, suggesting that whatever ails Lumbar Liquidators goes far beyond 60 Minutes’ hit-piece.But what about the short-term trajectory? Can swing-traders buy the bad news in anticipation of either a dead-cat bounce or a legitimate recovery? Prior to the price collapse, market sentiment indicators did waver, failing to build off prior peaks in strength and contrasting sharply with the bag-holding purchases made between $65 to $70. Sentiment is also stabilizing, which may predict a future recovery. However, the long-term picture is decidedly bearish: there can be no argument about that! Given that greater context, a short-term profitable trade is possible, but it must be accompanied with a very quick exit strategy should the market go awry.
As the management team is unwilling to take basic steps of accountability, an engagement with Lumbar Liquidators should be viewed in the most mercenary manner possible.