Lumber Liquidators slides, major short extended

Tilson increases short position in LL
Tilson: LL poisoning customers
Tilson: LL doing bogus testing

Lumber Liquidators shares fell again on Friday, marking a more than 50 percent loss for the company since it first disclosed that a negative "60 Minutes" story was on its way. But despite the fall, one major investor is betting it will go much lower.

Shares in the company, which traded Friday afternoon around $33, have fallen from more than $67 on Feb. 25 when the firm issued that warning during its earnings call. The stock sank even further when the report came out, alleging that Lumber Liquidators sold Chinese-made flooring with higher levels of formaldehyde than permitted under California's health and safety standards.

Read More'Made in China' doesn't have to mean 'dangerous'

As the stock continued its slide, Whitney Tilson, the 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.

Tilson said in a Friday note that he "added materially" to his short position on Wednesday and Thursday, bringing his bet to a 3.8 percent position—which he described as "a very large for a short for me."

A file photo showing traders waiting for shares of Lumber Liquidators to begin trading on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

The investor explained in his letter that he had not traded at all in the stock since early October.

"I didn't want there to be any questions about my trading in advance of the 60 Minutes story (you think nearly five months is conservative enough? ;-)" he wrote.

Tilson told "Fast Money: Halftime Report" on Monday that he had tried to short more of the company after last week's move, but said he was unable to secure any more to borrow.

Lumber Liquidators has that its products are safe and that it rigorously tests its flooring. It also said in a statement that the "60 Minutes" story used an improper test method for its conclusions, and originated from attacks "driven by a small group of short-selling investors who are working together for the sole purpose of making money by lowering our stock price."

Explaining his increased short, Tilson said he expects the company to face significant revenue issues related to the formaldehyde story.

Read MoreSenator urges US to probe Lumber Liquidators

"On the revenue side, this story has been picked up by a ton of local news outlets across the country, so millions of LL's past, present and future customers are aware of the formaldehyde issue – and they are freaking out based on numerous anecdotal stories I'm hearing: installers saying most of their jobs have been cancelled, contractors swearing to customers that they'll never use LL's products ever again, etc," he wrote.

"This leads me to believe that LL's sales ($1.047 billion last year) will take a major, lasting hit, no matter what spin the company puts out there. How big of a hit and for how long? Who knows. But it will be very material I think."

Lumber Liquidators lashes out at Tilson

As for expense pressures, Tilson identified three negatives for the company (increased legal and compliance costs, government penalties from an ongoing investigation into possible violations unrelated to the "60 Minutes" story, and possible liability payments arising from the formaldehyde issue).

"But even ignoring all of this, at the very least LL now has to of course start sourcing its products legally, which I think are likely to bring margins back to historical levels," Tilson wrote, explaining that his short thesis is based on his belief that the company was cheating on supply regulations.

Given these factors, Tilson wrote that he expects Lumber Liquidator's earnings to fall below $2 (estimates before the CBS report had put the figure around $2.74). Applying a multiple of 10 to this expectation, Tilson predicted the stock could be worth about $20.

Read More

But that would be a positive outcome, he said.

"Applying a more realistic scenario, I think the company might earn only $1.50 (and I truly think I'm being generous here) and trade at 6x this amount, leaving the stock at $9, down 73% from here," he wrote.

Lumber Liquidators said earlier this week that it had scheduled a conference call and audio webcast next week "to provide a business update."

There is significant institutional ownership in the company, with Fidelity owning about 15 percent of the firm.