I’ll admit it: I can sometimes be impatient. As an investor, that can mean frustration when the market takes its time to deliver the desired outcome.
That’s partly why the market is known as the great humbler.
In December 2009, I identified Eastman Kodak (EK) as one of the top bankruptcy candidates for 2010. That assessment has ended up being about a year and a half early. Although the company has refuted rumors of bankruptcy in the past week, fear has already sent shares to a buck.
Here’s why I made that bold claim about Kodak …
By late 2009, the company was hemorrhaging cash on its core business, photographic film. In a world that had long since gone digital, this was no surprise. The company was a late adapter and at a substantial disadvantage to competitors who got in early.
In the fourth quarter of 2009, the company reported a surprise $430 million in earnings. 98 percent, or $421 million of those earnings, came from so-called non-recurring revenue.
In accounting-speak, that means that there was a one-time event that boosted earnings. Basically, if a company sells a division or some assets and it’s not part of its core business, it’s reflected in that area.
Kodak’s non-recurring revenues, however, became a recurring event. That falls into what I call “fuzzy accounting,” an area that should raise red flags to potential investors but might not constitute outright fraud. As these non-recurring events became the driver of earnings, the company’s core business continued to decline.
Anyone looking at the numbers could tell something was off. Despite the company’s SEC filings, however, there wasn’t an explanation into these non-recurring revenues.
So I did something that most Wall Street analysts won’t do. I called the company to ask a few tough questions.
Now, I’m a numbers guy. I know in part that when you call a company as an investor, a public relations employee is likely to paint you a picture of the company that’s full of unicorns and rainbows.
With Kodak, I got the PR department’s voice mail. I’m still waiting for a call back. Sometimes, the most important thing isn’t what a company is saying, it’s what a company isn’t saying. That’s the event that clinched it. That’s how I knew Kodak was in serious trouble.
The few other times I’ve called companies to ask questions, I’ve gotten a wealth of information. Here’s a hint: The tone of someone’s voice will tell you if they’re genuinely excited about their prospects, or if they’re trying to mask an uncomfortable truth.
Predicting the bankruptcy of a former member of the Dow Jones Index isn’t the kind of call that makes an analyst popular. But investing isn’t about the attention (good or bad) your analysis may bring. It’s about being able to find a company that’s being mispriced by the market and investing accordingly.
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