Warren Buffett once famously suggested that the first rule of investing is not to lose money. If you’re considering a long position in Eastman Kodak (NYSE:KODK), be advised that losing money is a definite possibility as Kodak stock is a big mover in both directions.
It’s amazing to consider that Kodak stock was considered a safe, boring stock many years ago.
Back then, the company was known for manufacturing cameras that weren’t digital (imagine that).
And yet, most people probably didn’t know about Kodak’s other business. According to Akin Gump Strauss Hauer & Feld, Kodak has been involved in chemical manufacturing for many years. This segment of Kodak’s business would gain prominence during the onset of the novel coronavirus in 2020.
When a company and a stock have a Covid-19 connection, there’s a heightened potential for volatility. Now that Kodak is fully immersed in the battle against the coronavirus, investors must be extra cautious. Even while Kodak’s biggest scandal might be in the rear-view mirror, shareholders might still have to brace for a roller coaster ride.
A Scandal Hits Kodak Stock
Prior to July of this year, Kodak stock was shuffling along at $2 and change. Frankly, the stock was going nowhere fast. Hardly anybody on financial media and message boards was talking about this stock.
Remember how we touched upon Kodak’s chemical manufacturing business? Well, that had a major impact on the Kodak stock price in July. Famously, the company received a $765 million government loan as part of the Defense Production Act to commence production of generic drugs.
President Trump called this loan “a breakthrough in bringing pharmaceutical manufacturing back to the United States.” With that, Kodak stock jumped to a 52-week high of exactly $60.
Then came the scandal. Reportedly, the $765 million loan agreement was put on hold after allegations arose concerning “apparently spring-loaded options granted to the CEO and other’s trading just prior to the [government loan] announcement” (kudos to InvestorPlace contributor Mark R. Hake for the info on that).
The Relief Rally
In the wake of this scandal, a sharp drop in the KODK stock price commenced. By Sept. 9, KODK was trading below $6.
Soon, however, the KODK stock price would nearly double. Akin Gump Strauss Hauer & Feld was tasked with investigating the alleged illicit trading activity.
This probe involved “numerous documents, including over 60,000 electronic communications” as well as “44 interviews of Kodak personnel, Board members, and a third party with relevant information.”
When all was said and done, no illegal actions were found to have taken place. A relief rally ensued, with Kodak stock traders pushing the share price up more than 80% in a single trading session at one point.
Leaving a Bad Taste
Be aware, however, that absolving Kodak of legal wrongdoing isn’t the same as fully clearing the company’s reputation.
Indeed, Akin Gump Strauss Hauer & Feld’s investigation determined that Kodak had mishandled the stock options that the company granted to its CEO, Jim Continenza, in the days prior to the signing of the government loan deal.
With corporate governance concerns having been raised, it’s going to be challenging for shareholders to fully trust Kodak. This scandal could leave a bad taste for a while, even if Kodak gets back on track with its generic drug manufacturing business.
Even beyond that, investors must consider the words of Kodak board director Jeff Engelberg. Following the loan announcement a deemed shared price run up “Kodak moment for investor insanity.”
Engelberg further added that the loan “isn’t anything close to a justification for its massive share-price gains.”
The Bottom Line
Kodak stock traders must contend with the negative shock waves of the recent scandal. This holds true even if no illegal activity was found. Moreover, questions might arise as to whether the share price run-up was excessive.
Therefore, it’s reasonable to conclude that there’s more volatility in store for Kodak stock. Consequently, caution is definitely advised.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.