Activist investor Robert Chapman has taken a long position in Lumber Liquidators despite a "60 Minutes" report that raised questions about the safety of its products.
"The critics of Lumber Liquidators, from a consumer standpoint, often compare them as the Wal-Mart of flooring, and that's precisely the bull story here," the CEO of Chapman Capital said Wednesday on CNBC's "Fast Money Halftime Report."
"These guys only have 350 locations in the U.S., ... and their penetration is just getting started and they grow about 5 percent here in the U.S."
Chapman said his position in Lumber Liquidators is roughly 15 percent of his fund and is partly through call options.
Lumber Liquidators' stock spiked nearly 11 percent in afternoon trading Wednesday.
The position comes as a surprise, as Lumber Liquidators has been under fire since the CBS news program claimed on March 1 that the company sold flooring with higher levels of formaldehyde than permitted under California's health and safety standards.
The report was also followed by a slew of negative headlines that have, in part, driven down the company's stock by about 35 percent. Chapman said the reports only encouraged him to raise his bet.
"This is precisely the fodder that makes for good investments. You can go through a lot of volatility in these things. There's going to be a lot of headlines risk for a while. ... It's just the nature of the beast, but it's that inherent fear that's baked into these stocks that provides the huge opportunity."
Lumber Liquidators has defended the safety of its products and dismissed the "60 Minutes" report as untrue. It challenged CBS' methodology and claimed it was the victim of short sellers.
Last week, Whitney Tilson, founder and managing partner of Kase Capital Management who originally brought the story to the CBS program, said he was increasing his short position against the company.
Chapman dismissed Tilson's comments. "The key part of the short story is that somehow Lumber Liquidators cheated their operating margins by 6 to 10 percent over the last few years. It really doesn't make any sense when you look at comps. Home Depot saw their operating margins double from 6 to 12 percent. Wal-Mart in eight years went from 4 to 6 percent … and Best Buy's margins tripled from 1.5 percent to 4.5 percent."
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