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Why Hurricane Harvey and Hurricane Irma Are Terrific News For This One Company

Sep 07, 2017

As Houston tallies up the damage from Hurricane Harvey and Florida prepares for Irma's potential landfall, Wall Street investors are searching for potential winners amid what are shaping up to be two of the costliest storms in U.S. history.

One such high-climber? Lumber Liquidators, a hardwood flooring firm that could benefit as homeowners seek material to rebuild.

Lumber Liquidators has been in a slump since 2015, when 60 Minutes reported, and the CDC later confirmed, that some of its products could increase users' risk of cancer. The company's stock rallied slightly after the U.S. Consumer Product Safety Commission completed a probe without issuing recalls. But the Commission also failed to reassure consumers with health concerns, causing lasting damage to the brand's appeal.

But Lumber Liquidators' stock is now hitting levels not seen since just after the 60 Minutes segment — in part thanks to Hurricane Harvey and Hurricane Irma.

Ever since the National Hurricane Center began issuing advisories on Harvey starting August 17, shares of home improvement companies have been on the rise — Home Depot's stock has risen about 5% since then, while Lowe's has risen 3%. But Lumber Liquidators has outperformed many of its peers on the Dow Jones Home Improvement Retailers index. While the index, which tracks stock performance of 45 companies in the industry, rose 0.32%, Lumber Liquidators has jumped about 13% since mid-August. That suggests some investors are betting that shoppers will get over Lumber Liquidators' past as homeowners buy material for rebuilding efforts.

Part of the Lumber Liquidators' outperformance may also stem from the company's steady recovery; the firm's stock price has risen by nearly 150% since January. "Overall, we view the recent move higher in shares of Lumber Liquidators to reflect a combination of investors still 'waking up' to the compelling turnaround story at the chain . . . ," said Oppenheimer analyst Brian Nagel in an email to Fortune. The company's second quarter earnings beat also helped move the stock higher, though shares remain down about 66% since their all-time high of $119 in 2013.

Another factor likely helping Lumber Liquidators outperform its peers: volatility. There are far fewer of the firm's shares available for trade in comparison to, say, Lowe's or Home Depot, meaning the stock price can move more dramatically with fewer total shares traded. Moreover, Lumber Liquidators' past has also turned it into a heavily shorted stock—about 25% of its available shares are being shorted. It's likely that short sellers are buying shares of the company as it rises in order to cover their positions, which would also drive up the stock's price.

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