Behavioral Finance
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The insane trading of Eastman Kodak shares should raise concern
(03 Aug 2020) Quick, what comes to mind when you hear the word Kodak (KODK $2-$18-$33)? Maybe an old camera you or your parents used to take on vacations in the 1970s? Or maybe that workhorse inkjet printer sitting in your home office? Perhaps even a classic Paul Simon song from 1973? Chances are, the name doesn't make you think of active pharmaceutical ingredients (APIs) for use in drugs. Nonetheless, that last category has been the catalyst for frenetic movement in the company's share price over the past two weeks. It began when the iconic camera maker landed a $765 million government loan under the new Defense Production Act—authorized by President Trump back in May—to help fix America's medical supply chain problem; specifically, our reliance upon communist China for about 85% of our drug ingredients. While the shift from photos and printers to drug production may seem like a radical departure for the 132-year-old company, the firm has a long history of working with chemicals and advanced materials. But the real story is the stock's crazy price movement. This company went from having a $95 million market cap in June to a $1.5 billion market cap at the end of July. Now wait a minute. Even if the government loan (which can be paid back over 25 years) were an outright gift, that would still just bring the market cap up to $860 million. Here's the magic formula that made KODK an overnight darling among Robinhood users: it was selling for under $10 per share, and there was a nice story to tell with the DPA loan. Bammo! Price goes from $2 to $33 to $18 all in the matter of ten trading days. Now the reality: This deal will help energize a company that was floundering badly, but it is not a magical panacea that will suddenly make it investment-worthy.
(03 Aug 2020) Quick, what comes to mind when you hear the word Kodak (KODK $2-$18-$33)? Maybe an old camera you or your parents used to take on vacations in the 1970s? Or maybe that workhorse inkjet printer sitting in your home office? Perhaps even a classic Paul Simon song from 1973? Chances are, the name doesn't make you think of active pharmaceutical ingredients (APIs) for use in drugs. Nonetheless, that last category has been the catalyst for frenetic movement in the company's share price over the past two weeks. It began when the iconic camera maker landed a $765 million government loan under the new Defense Production Act—authorized by President Trump back in May—to help fix America's medical supply chain problem; specifically, our reliance upon communist China for about 85% of our drug ingredients. While the shift from photos and printers to drug production may seem like a radical departure for the 132-year-old company, the firm has a long history of working with chemicals and advanced materials. But the real story is the stock's crazy price movement. This company went from having a $95 million market cap in June to a $1.5 billion market cap at the end of July. Now wait a minute. Even if the government loan (which can be paid back over 25 years) were an outright gift, that would still just bring the market cap up to $860 million. Here's the magic formula that made KODK an overnight darling among Robinhood users: it was selling for under $10 per share, and there was a nice story to tell with the DPA loan. Bammo! Price goes from $2 to $33 to $18 all in the matter of ten trading days. Now the reality: This deal will help energize a company that was floundering badly, but it is not a magical panacea that will suddenly make it investment-worthy.
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The Fallacy of Efficient Market Hypothesis
From the Editor: If there is one lesson investors should take away from the past few weeks, it is just how easily external events can change the trajectory of the stock market within a matter of minutes. The market bulldozed through the "worst months of the year" like a hot knife through butter, and was on target for yet another record week in the waning days of November.... |