Why Lumber Liquidators Stock Just Dropped 9%

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What happened

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Shares of flooring specialist Lumber Liquidators (NYSE: LL) dropped more than 10% in early trading after analysts at Wedbush, a highly regarded investment firm, announced they were removing their outperform rating for the stock and downgrading it to neutral. The financial company also cut its price target by nearly 30%, to $28 per share.

Lumber Liquidators' share price has rebounded slightly from its lows of the day, but remains down 9.2% as of 11:20 a.m. EST.

So what

Previously positive on Lumber Liquidators, Wedbush warned this morning that it's losing faith in the company's ability to improve its "fundamentals." Sales growth is slowing, says the analyst, while interest rates are rising and transport costs are going up as well.

Accelerating promotions and increased competition, adds the analyst, will ding fourth-quarter results, "increasing margin pressures" on the company and making it harder to predict trends in sales growth.

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Now what

Investors were spooked by Wedbush's comments, and that's not really surprising. After all, Lumber Liquidators has spent most of the last four years losing money and burning cash.

With no trailing profits to its name, Lumber Liquidators stock depended heavily on analyst predictions of a return to profits this year, and 30% growth in profits in future years, to support its 30x forward earnings valuation. If even professional analysts are losing faith they can predict the company's earnings power, that has to unnerve individual investors, too.

Result: They're both throwing Lumber Liquidators on the scrap heap today.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lumber Liquidators. The Motley Fool has a disclosure policy.