Kodak – did some traders have a sharper image?

It’s worth stating up-front that references to photography in this article are quite naughty, because the current excitement around Kodak has absolutely nothing to do with photography.

You may be old enough to remember yellow Kodak stores in shopping malls that allowed you to print photos from film (?!?) and even buy photo albums and cameras. Kodak’s business model was left behind by technology.

Kodak’s least enjoyable “Kodak Moment” was filing for bankruptcy protection in 2012, as the once-great American company faced an inevitable restructure. In an incredible piece of irony, a Kodak engineer had invented the prototype digital camera back in 1975, but Kodak management shut it down because they were making terrific profits from film. The innovation that killed them was born within the company.

Fast forward to today and Kodak is a small industrial player with a decent library of patents and modest profits. Covid-19 has thrown the company an incredible opportunity.

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Bringing the supply chain home

Trump is placing enormous focus on the fight against “big pharma” as he struggles in the wake of a failed response to Covid-19. The pandemic has thrown Chinese supply chain strategies under the spotlight and Trump is trying to capitalise on that with a double-win of reducing drug prices and bringing the supply chain back to the US.

Kodak, an American company with a rich history and a fairly poor balance sheet, is only too thrilled to help.

The US government has given a 25-year loan to Kodak of $765m. Whilst generic drug manufacturing isn’t necessarily a high margin business, it’s still an excellent opportunity for the industrial company to enter the pharmaceutical space with government support.

Now for the juicy stuff: insider trading

Stock exchanges exist because they provide a regulated place for buyers and sellers to come together. This creates a vibrant market where companies can be listed to raise capital and enable trading in their shares.

In a perfect world, everyone behaves properly and trading is robust, enabling proper “price discovery” for companies i.e. a share price that reflects the true value of the company.

The world isn’t perfect. Not all shares are liquid and price discovery is often inefficient. This pales in comparison to insider trading, an illegal activity that gives an unfair advantage to some people at the expense of others.

Insider trading is the act of trading based on material and precise information that isn’t publicly available. It does not apply to thorough analysis resulting in some investors having a clearer view than others, as this is clearly where deep equity research adds value. The point is that this analysis is conducted using public information rather than tips from insiders of major events.

The debate around insider trading is often murky. How precise is the information? Is it material to the share price? The most clear-cut example is the announcement of a merger or a major corporate event, which can significantly impact the share price.

The Kodak share price rallied before the announcement

Before this week, Kodak was a $115m company that nobody really bothered with. Trading volumes were fairly subdued and the company was limping along.

In intraday trading on Tuesday, it was up nearly 2,200%. Volumes were through the roof.

This extraordinary rally was driven by the pharmaceuticals news and by Robinhood traders plowing into the company. There were approximately 9,300 Robinhood traders holding Kodak shares before the loan announcement. A day later, there were 72,000. That’s powerful.

Although you would be hard-pressed to see it on the share price chart, the suspicious rally happened on Monday, the day before the news broke. The share price closed nearly 25% higher, despite no public news flow to explain this.

Obviously, some people knew exactly what was coming on Tuesday.

The Securities Exchange Commission (SEC) in the US doesn’t play games. They will fully investigate the trades, with access to the beneficial holder of the shares and their full trading history.

Sure, some people would’ve simply bought the rally as part of normal trading behaviour. However, any traders with links to Kodak employees, the government or the public relations agency will be having some unpleasant conversations with people in dark suits.

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