A Kodak Moment

Shares of Kodak soared more than 2,700% from July 27 to July 30. If you had a crystal ball or insider information, you could have turned $100,000 into $2.7 million as the stock rose from $2.13 to $60. The average trading volume for Kodak (KODK) for the past five years has been 481,000 shares. Two days before shares of Kodak climbed sharply, 284 million shares changed hands.

KODK_chart

The price of Kodak soared because they received a $765 million loan under the Defense Production Act so it can begin producing pharmaceutical ingredients.[1] I had no idea they manufactured drugs. Oh, and on the day before Kodak announced its deal, the board of directors awarded its chairman 1.75 million shares of company stock.[2]

Eastman Kodak was founded in 1888, 132 years ago, primarily to produce film for cameras. Eastman Kodak was a powerhouse, a blue-chip. They were added to the Dow Jones Industrial Average in 1930, where it remained for seventy-four years. Eastman Kodak was part of the nifty-fifty, a group of high-flying growth stocks, during the 1960s and 1970s, along with Bristol-Myers, Coca-Cola, GE, IBM, Pepsi, Pfizer, Sears, and Xerox. In 2012, Kodak declared bankruptcy, and one year later, they emerged from bankruptcy protection, a different company to focus on five divisions: print systems, enterprise inkjet systems, micro 3D printing and packaging, software and solutions, and consumer and film.[3] Pharmaceutical manufacturing is not one of their stated divisions.

My first photography class was in 8th grade. I borrowed my aunt’s 35 millimeter Pentax camera for a school project. I went to Thrifty’s Drug Store to purchase a roll of black and white film. When I finished my project, I dropped off the film at the drive-up Kodak kiosk in the mall parking lot. I returned a few days later to pick up my pictures – a few I still have today. When I became a stockbroker in the early 90s, Kodak (EK) was one of the first companies I purchased. It was going to be a cornerstone of my portfolio because of their growth prospects and dividend yield.

The recent move in Kodak shares may tempt you to hunt for undeveloped stocks in hopes of quick riches. Before you take the plunge and start buying low-priced, speculative stocks, here are a few suggestions to help you avoid some common mistakes.

  • Greed. Since peaking at $60, Kodak stock has dropped 72% to $17.05. The stock remains volatile as speculators try to trade around the news and catch another shooting star. I believe most traders will eventually lose money on this stock as greed attracts speculators like a moth to a flame.
  • Diversify. If you plan to purchase companies trading below $5, buy hundreds of them because most of them will lose money. If you can find one Kodak, among 99 losers, you’ll make money. According to YCharts, 2,826 companies are trading between $1 and $5 per share, so choose wisely. Spread your bets around the table.
  • Limit your speculative capital investment to 3% to 5% of your taxable trading account assets If you plan to purchase stocks below $5. If your account balance is $100,000, then your speculative trading pool will be $3,000 to $5,000.
  • Margin. Day traders try to amplify their gains by purchasing stocks on margin. My recommendation is to avoid margin entirely, but if you must use it, limit your debit balance to 10% of your trading account value.
  • Using options to leverage your gains on low-priced stocks is not recommended because an option is a wasting asset. Professional options traders will increase the implied volatility on options contracts for speculative stocks like Kodak, making them very expensive. For example, the implied volatility for Kodak’s August 21 call option with a strike price of 15 is 300, meaning option traders expect the shares to move up, or down, by 18.8% daily. By comparison, McDonald’s implied volatility is 21, or 14 times less volatile than Kodak.
  • Nimble. If you’re one of the lucky ones to buy a low-priced stock before it takes off, enjoy the ride. If possible, sell enough shares to cover your original cost and let the remainder run so you can play with the house’s money. However, if the stock starts to fall, cut your losses and move to a new idea.

Kodak was a juggernaut, generating more than $10 billion in sales in 1981, employing more than 120,000 at its peak, and producing 50 million Instamatic cameras between 1963 and 1970.[4] However, it lost its way, and it’s now trying to rebrand itself – again. I don’t know how Kodak’s deal will develop, so tread lightly and be careful.

Nostalgia often leads to idle speculation. ~ J. Paul Getty

August 4, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

[1] https://finance.yahoo.com/news/kodak-stock-skyrockets-deal-drug-200548406.html?.tsrc=rss, By Michelle Jones, July 29, 2020

[2] https://www.cnbc.com/2020/08/01/eastman-kodaks-top-executive-reportedly-got-trump-deal-windfall-on-an-understanding.html, Reuters, August 1, 2020.

[3] https://en.wikipedia.org/wiki/Kodak, Website accessed August 3, 2020

[4] https://theweek.com/articles/481308/rise-fall-kodak-by-numbers, The Week Staff, October 3, 2011. Website accessed August 3, 2020