4 Reasons To Avoid Kodak
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well.
Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.
4 Reasons To Avoid Kodak
- Who Knew Kodak Was Operating Still?
I didn’t until a few days ago when President Trump announced a $765 million loan to the company to make ingredients for drugs.
When I was a kid Kodak was one of the most well-known companies in the world.
At its height it owned an estimated 80% market share of the US and 50% globally in the photography market.
But then declined to bankruptcy in 2012 as the rise of digital cameras destroyed Kodak’s legacy business of developing pictures.
I’ve been in the market for 13+ years now. And am reading news, annual reports, financials, and other stuff related to the markets and stocks every day.
I had no idea Kodak was even still around much less a public company until a few days ago.
And this gets us to reason #2 to avoid its stock.
After President Trump announced the $765 million loan to Kodak its shares skyrocketed as much as 1,900% in intraday trading.
When you consider closing prices, shares rose from $2.10 per share at the close on July 24th… Right before the announcement. To a high closing price of $33.20 per share on Wednesday July 29th… After the announcement.
This is an increase of 1,481% based on its closing prices before and after the announcement.
Why did its shares skyrocket so much?
Because this $765 million loan was 747% higher than its market cap of $90.3 million on July 24th.
And people bought Kodak shares as fast as they could because of the opportunity for huge profits that dwarfed the size of the company.
Since July 29th, its shares are now back down to $16.40 as of this writing.
This is a fall of 50.6% in a matter of days.
Partly because of speculation and people selling shares to earn profits.
But also because of reason #3.
3. Kodak Debt Holders Are Converting Debt Into Equity
When you see rampant speculation in a stock you often see other issues crop up as well.
And Kodak is no different.
Kodak shares dropped like a rock on Monday August 3rd when its debt holders announced that they were exchanging their debt for the equivalent of 30 million shares.
Before this loan it had 43 million shares outstanding. Now it will have approximately 73 million shares outstanding.
This dilutes shareholders by 69.8%.
Think of this like a pizza…
When Kodak issues more shares, the same size of pizza stays… But more people are around to eat it so the piece of pizza you have gets smaller and smaller the more it dilutes shares.
When a company does this it leaves the same size of the pizza but eventually, you’ll get to eat little to no pizza.
In this case, people who owned Kodak stock before August 3rd now own 69.8% less of the company all else remaining equal.
And this means they also own 69.8% less of the potential windfall from the $765 million loan.
Even though all of this is bad… Bad enough by itself that you should stay away… There’s still one more thing that’s even worse.
4. Kodak Hasn’t Produced Any Pharmaceuticals In Decades
Kodak got this $765 million loan to produce ingredients for drugs and pharmaceuticals… But there’s one huge problem.
Well one more huge problem on top of the other ones above.
It hasn’t produced any pharmaceuticals since 1993 when it sold out of its failed pharmaceuticals division at a loss of billions of dollars.
In the release announcing this $765 million loan it says, “Kodak is using the funds to “launch a pharmaceuticals division to make essential drug components in “chronic national shortage.”
Emphasis is mine above.
When you read launch above think start.
In the 27 years since 1993 Kodak hasn’t produced any pharmaceuticals or drugs.
But it got a $765 million loan to do so now.
And yet is got a $765 million loan to do so.
Could this loan lead to more success for the company in the future?
But there’s no way I’m investing in its stock based on hopes… Especially when you consider all 4 Reasons To Avoid Kodak together.
Stay away from Kodak and the rampant speculation going on in its shares.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.