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Follow the Insiders and Sell Louisiana-Pacific

- By Jonathan Poland

Since August, a director, an executive vice president, the CEO and interim chief financial officer have all sold shares of Louisiana-Pacific Corp. (LPX). While the company does have some of the best money managers as shareholders - names like Simons, Gabelli, Cohen and Greenblatt - with earnings set to be released next week, it's time to sell or wait for a better buying price.

Louisiana-Pacific produces building materials, primarily oriented strand boards, used in home construction and generates the majority of its revenue in the U.S. However, the company is much more dependent on market cycles to produce positive results than other cyclical stocks. Investors looking at the company's current performance snapshot may think it is a no-brainer.

The company generated close to $500 million in after-tax income on $2.9 billion in sales over the last 12 months. Net profit margins are close to 20%, helping it generate high returns on assets and equity of 17.50% and 32.07%. Moreover, the company has $1 billion in cash and just $375 million in debt, its capital expenditure spending is less than $200 million, and the stock is trading at six times earnings.

Maybe you're thinking, "Hey! This looks like a pretty good company."

But wait, looking back over the last decade, investors are presented with an entirely different picture - one that makes Louisiana-Pacific a stock to avoid, not buy, even at this level. Is the stock a falling knife? With earnings coming out on Nov. 6, it might be.

Louisiana-Pacific has no competitive advantages despite being the second-largest manufacturer of oriented strand board in North America, with close to 6 billion square feet of capacity throughout Canada and the southeastern United States. In the last decade, the company has lost money five out of the 10 years. Even throwing out the 2008 loss of $578 million, it has produced less than $350 million total in the last 10 years. If Shark Tank's Kevin O'Leary (Mr. Wonderful) were looking at this from a private investment standpoint, he would wonder how long it would take to get his money back.

Homebuilding and remodeling are the company's principal end markets. With interest rates moving higher, the housing market is set to suffer short-term volatility as it finds footing under the new trend.

That said, housing starts are still projected to be around 1.5 million, which means Louisiana-Pacific should remain profitable. Estimates, however, are all over the board for 2019 - from $1.28 to $3.24. Plus, with sporadic earnings in the last decade, valuing the company on would-be earnings per share numbers doesn't make sense. Perhaps the best way is on its top line, which has been on a consistent upward trajectory since 2009. In fact, sales have almost tripled in that time and the company's five-year average price-sales multiple is 1.3.

If the company can continue its torrid growth and revenue comes in at $3 billion by 2020, the per-share value increase could be $6, putting the price in the high $20s. My guess is that revenue will likely fall along with the housing starts. While the long-term volatility will taper off, Louisiana-Pacific has to demonstrate that it can remain profitable. It's just too risky to predict going into this earnings announcement.

Disclosure: I am not long or short LPX.

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This article first appeared on GuruFocus.