In this stock screen, we set out to find equities that have underperformed the broader market averages by a wide margin over the past three months, yet still command relatively high valuations and have shown solid revenue growth of late. In order to identify stocks that once had sky-high valuations but have since come back down to earth to a degree, we screened The Value Line Investment Survey for equities that have delivered a -10% total return over the past three months, which compares to a 1% loss recorded by the S&P 500 Index over that same time frame. Next, we made sure that sales had increased by more than 20% in the past year and the forward price-to-earnings multiple was above 25. The resulting list of seven stocks can be seen below. Of these, we have chosen to highlight Lumber Liquidators (LL).

Lumber Liquidators is one of the largest retailers of hardwood flooring in North America. It operates around 300 retail stores throughout the United States, each averaging around 6,500 square feet. It boasts a differentiated product offering that includes foreign and domestic hardwood species, engineered hardwoods, laminates, bamboo, and cork products. Its primary customers include homeowners or contractors acting on behalf of homeowners.

The company is known for having relatively low prices, thanks to its ability to source directly from more than 100 vendors (primarily sawmills). Lumber Liquidators is the largest customer for many of its supply chain partners, thanks largely to its ability to cultivate strong, long-lasting relationships. This allows it to attain better prices than many of its larger rivals, which primarily consist of The Home Depot (HD - Free Home Depot Stock Report), and Lowe’s, Inc. (LOW). Together, these two chains command around 30% of the U.S. hardwood flooring market, compared to around 10% for LL. In 2012, approximately 43% of Lumber’s products were sourced from Asia, 50% came from North America, 6% from South America, and 1% from other locations.

Since its initial public offering in November of 2007, the stock price has risen a whopping 953%. Over the past two years, Lumber shares have advanced 429%, and they now trade at 30.7 times Value Line’s forward earnings estimate. The company's high valuation remains despite the fact that the shares have fallen nearly 20% in the prior three month period.

Indeed, Lumber Liquidators saw a sharp stock-price selloff after its third-quarter year-over-year revenue growth of 24.5%, and 59% bottom line advance fell short of Wall Street’s lofty expectations. The company continues to report successes with its new store openings and supply chain optimization efforts. These activities will likely accelerate throughout 2014, as the company looks for additional ways to extend its strong growth rate of recent years.

Lumber Liquidators is also dealing with negative sentiment surrounding legal issues. LL faces accusations regarding improper sourcing of wood from protected forests, and the presence of harmful chemicals in its flooring products. Management maintains that it is complying with regulations, but this may well end up hurting margins over the long run.

Although the recent bout of profit taking has made the stock's valuation somewhat more attractive by recent standards, value investors will still want to tread carefully. That said, the company still looks like it will be able to post strong year-over-year gains well into the 3- to 5-year horizon. LL expects that 30-40 new stores will be opened in 2014 alone, and has repeatedly emphasized the diversity of its direct providers and product assortment. If things proceed relatively smoothly, then this recent pullback will likely only be a temporary pit stop as the stock heads towards healthy long-term growth.




Sales Growth 1-Year

Total Return 3-Month

Current PE Ratio

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Lumber Liquidators





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At the time of this article's writing, the author dis not have positions in any of the companies mentioned.