By Lee Sherman
Governments bail out struggling companies with alarming frequency. But rarely has this been as concerning as a couple of weeks ago, when Kodak received a $765 million USD loan under the Defense Production Act as the venerable American manufacturer of film and photography products pivoted to the production of personal protective equipment (PPE) including hand sanitizer, face shields, printed circuit boards, and ingredients for pharmaceuticals.
If you hold Kodak stock, you’re in luck. Since the end of trading last week, the stock was up a whopping 1,500 percent, in part due to President Trump’s mentioning the company by name. However, the company is now under fire from the SEC, since chairman Jim Continenza bought 46,737 shares of Kodak stock on June 23 at an average price of $2.22 USD. That $103,575 USD investment is now worth more than $1.5 million USD.
Putting aside the ethical concerns, Kodak, despite being one of the most recognized brands in the world, had been struggling for years, prior to the coronavirus. Film photography is now something that only dedicated hobbyists pursue. And the once ubiquitous Kodak Instamatic has been replaced by the superior digital camera in your mobile phone. So, without insider knowledge, most financial advisors would not have recommended Kodak stock.
Generally speaking, it’s not a good idea to try to profit from a crisis. While an argument could be made that Kodak is a safer bet now than it was even a month ago, investing in a company that has recently received a cash injection is one form of trying to time the market, something that financial advisors typically advise against.
A government bailout might prevent the value of your shares from going to zero and prevent a company from having to go bankrupt. When a company goes bankrupt, its assets are sold for cash, which sounds good until you realize that as a shareholder in the company, you’ll be the last to get paid and will most likely never get paid at all. First, the company must pay off its creditors and, for most companies in the throes of bankruptcy, those creditors will themselves only receive pennies on the dollar. Institutional investors get paid next. By the time, it comes to individual shareholders, there’s usually little to nothing left.
Government bailouts can take the form of a handout, a loan, or even outright ownership. For investors, ownership is the least desirable option, especially in the US. Government run businesses are historically less competitive than private enterprise and less likely to produce ongoing dividends.
If you already own shares in a company like Kodak, now might be the time to sell but remember that stock prices may be artificially inflated. As always, it’s important to consider the overall financial health and relevance of a company before buying or selling,
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.