Lumber Liquidators is surging after an infamous short-selling firm uses logic to explain why the company isn't screwed

Influential short-seller Citron Research says in a new note that the sell-off in hardwood floor retailer Lumber Liquidators may be “largely overdone.”

Following a troubling “60 Minutes” investigative report on the company which aired on March 1, shares have collapsed about 40%. On Tuesday, they were last trading up 10%, or $US2.80, at around $US30.75.

“60 Minutes” found that Lumber Liquidators appeared to be selling laminate flooring from China with levels of formaldehyde higher than what’s permitted under California law. High levels of formaldehyde have been tied to a number of health concerns.

Afterwards, Lumber Liquidators said in a statement that they the believed “60 Minutes” used “an improper test method in its reporting.” The company has also scheduled a conference call for Thursday morning to discuss their products.

In their note, Citron pointed out that folks may have missed a document posted on California Air Resources Board (CARB) homepage advising people not to rip up their composite wood flooring. The document does not mention the “60 Minutes” report.

“…As a general rule, we do not recommend removing a flooring product unless there are noticeable health effects (i.e. nose and throat irritation, a burning sensation of the eyes, wheezing, and difficulty in breathing), and other measures taken to alleviate them have failed and there is good reason to believe the flooring is the source of the problem.”

Citron also noted that they think it’s likely CARB was aware of the “60 Minutes” investigation.

Investors and short sellers take note: Let us take this logic a step further. We can only assume that the California Air Resources Board has known about the 60 Minutes piece for a few months now. We would speculate with near certainty that 60 Minutes reached out to the agency. Not only have they advised consumers not to rip out their floors, they have not even ordered Lumber Liquidators China import product off the shelves in California. If in fact the company was “poisoning” people, as some investors would have you believe, than at the least CARB would immediately halt all sales of noncompliant product,” the Citron note said.

All in all, Citron recommended “cautious investing to all…long or short.”

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