Whitney Tilson Says He Is 'Shocked' By Resignation Of Lumber Liquidators' CEO, Maintains As Largest Short Position

Hedge fund manager Whitney Tilson on Thursday released a letter on Thursday detailing his thoughts on the resignation of

's CEO Robert Lynch. Tilson is the founder of Kase Capital and holds a short position in Lumber Liquidators. His short position is based on his well communicated view that the company has been knowingly endangering its customers with toxic, formaldehyde-drenched laminate flooring. "The announcement this morning that Robert Lynch is resigning as Lumber Liquidators' President, CEO and board member was not only a surprise to the company, but to me as well," Tilson wrote. "In fact, in light of the company's circle-the-wagons, deny-and-attack approach since the 60 Minutes story aired on March first, I'm shocked by this announcement because it undermines all of the company's denials since the 60 Minutes story aired." Tilson continued that the resignation serves as "powerful evidence" that Lumber Liquidators has for years been selling its customers flooring with high levels of formaldehyde. In addition, the hedge fund manager noted that the resignation also proves that senior executives at the company "knowingly did this" to save 10 percent on sourcing costs. With that said, Tilson reaffirmed that Lumber Liquidators is a "notorious bad actor" with a history of "not being serious about compliance." Looking forward, Tilson speculated that the relevant regulatory authorities probing Lumber Liquidators will take "decisive action" to punish the "rogue" company. Lynch "saw the writing on the wall" and felt the better course of action to take was to "jump before being pushed." However, Lynch's departure could be good news for the "few remaining" bulls. "If Lynch was, in fact, a major source of the rot in the company, then his departure is good news for Lumber Liquidators and everyone who interacts with it, most importantly customers," Tilson noted.

Tilson stated that he has no immediate plans to add to his short position, nor is he looking to cover his position for a profit. He offered two reasons why Thursday's resignation announcement won't necessarily mark a bottoming of shares. First, Tilson sees "nothing bad news" emerging for the company over the short, intermediate and long-term horizons. In fact, he is expecting regulators (most likely the California Air Resources Board and the Consumer Product Safety Commission) to announce that their tests of the company's Chinese-made laminate are consistent with those featured during the 60 Minutes segment. Second, Tilson argued that shares are still "significantly" overvalued. At a price of $21.50, shares are trading at 46.7x 2015 estimates ($0.46) and 13.6x 2016 estimates ($1.58). These multiples are "much too high" for a company of "mediocre quality (at best)" facing a worst-case scenario in which future liabilities could bankrupt the firm. "Think about it: would anyone care if Lumber Liquidators ceased to exist?"