This Stock Surged 1,600% in Three Days, How Can You Profit?

Kodak Stock Goes Wild

I think it’s safe to say that Eastman Kodak Company (NYSE:KODK) wasn’t really on anyone’s radar before the last few days.

Famous for being a more-than-century-old American photography company, and more recently for going bankrupt in 2011, Kodak has almost overnight become one of the strongest performers on the stock market. KODK stock surged by an astounding, jaw-dropping, unbelievable 1,600% or so in three days. But why?

Well, the answer is rather simple: a huge injection of government funds. A loan of $765.0 million was made to the company, courtesy of the U.S. federal government, more specifically the Donald Trump administration. (Source: “Kodak’s Stock Triples as Company Announces Pandemic Plan to Start Making Pharmaceutical Ingredients,” MarketWatch, July 29, 2020.)

And no, the money is not because America is in desperate need of cameras or film. Instead, it has to do with China and the coronavirus.

Allow me to explain.

Kodak stock surged because the company is now pivoting away from being a dying camera company to one that will produce chemicals for pharmaceutical companies in the United States.

This is a dual win: 1) it allows the U.S. to rely less on foreign providers (namely China) when it comes to medicine-making, and 2) Eastman Kodak Company producing pharmaceutical ingredients at a time when the world is looking for a COVID-19 vaccine is likely going to be profitable for the company.

“Never again do we want to rely on shipments from China or elsewhere in order to get lifesaving medical supplies,” said New York Governor Andrew Cuomo. (Source: Ibid.)

Chart courtesy of StockCharts.com

KODK stock’s astronomical gains speak to two separate yet important factors on the stock market.

The first is that pharma is hot right now. Iron hot. Boiling hot. Center-of-the-sun hot.

People want a COVID-19 vaccine, and they are done waiting. As such, governments will happily dole out hundreds of millions (perhaps even billions) of dollars to see that happen.

The company that’s able to find a vaccine (or, in Eastman Kodak Company’s case, play a central role in the production chain) could greatly benefit. And you can bet that investors are going to be hungrily watching this sector.

I’ve written numerous times about another huge winner in 2020: Moderna Inc (NASDAQ:MRNA), which seeks to be the first company to develop a COVID-19 vaccine. This speaks to the massive appetite that Wall Street and investors in general have for pharmaceutical stocks right now, which has naturally resulted in Kodak stock going higher.

The other important thing to note is that KODK stock was in a bad place before the news hit. I mean, its 12-month chart is laughable at this point.

Chart courtesy of StockCharts.com

Eastman Kodak Company’s prolonged failures of the past, coupled with its huge, surprise pivot and massive investment deal has, as you’d imagine, been hugely beneficial to the company’s share price. The circumstances, in other words, couldn’t have been better for Kodak stock.

But here’s the important question now: can you still profit from KODK stock?

KODK Stock Moving Forward

I’ll be totally up front with you: Kodak stock has the potential to be one of the most volatile stocks this year.

When you see huge climbs in a matter of days like the one Kodak has made, that’s usually not a great sign for the future of the company. I’ve seen it time and time again; a high degree of hype almost always ends with a correction.

Now, that doesn’t necessarily mean KODK stock is doomed. Far from it; the company is serving an important need in the economy right now, and it may find itself duly rewarded again and again.

In fact, there’s a good chance that Kodak stock could still go up in the future. But it’s important to understand that this type of rise means the stock is unstable (although not necessarily in a bad way). It just means that, if you’re going to invest in KODK stock, understand that there’s a chance you could see a significant loss.

Now, having said that, there are some very positive aspects about the $765.0-million loan.

The first is that it’s government money. Government, as we all know, is the cow that you can milk revenue from forever if you play it right. Just look at the most recent stimulus bills, both passed and proposed.

The government money coming in translates into Eastman Kodak Company being a more secure company.

The next important thing to remember is that pharma stocks are on fire right now, and there is no sign of that slowing down until a COVID-19 vaccine is developed. Until that time, hype will concentrate immense amounts of wealth in this sector, which in turn will boost the shares of companies purporting to play a role in the vaccine development.

This is actually a very educational example of why media attention can sometimes be the most powerful motivator for a company’s share price.

Pretty much all that the media is talking about these days is the coronavirus, and that’s almost all that analysts and investors hear about as well. That gets into your brain and influences you to see this as a big deal (which, to be fair, COVID-19 is). And big deals in the media often precede big deals on the market.

The best way to profit from Kodak stock, then, is to go in with your eyes open.

Yes, there’s a good chance that the stock will continue to surge—doubtful at the same level, mind you, but we can still expect to see gains.

On the flip side, there could be a massive correction for KODK stock

Really, the issue won’t be settled until we see the fruits of the government loan. How many deals will Kodak sign to produce pharmaceutical ingredients, and how central a role will the company play in the manufacturing of a COVID-19 vaccine?

So, there’s a lot yet to be determined. Having said that, Eastman Kodak Company is now a company that I will be watching intensely

Analyst Take

This has been a wild year on the stock market. COVID-19 has created one of the most unpredictable markets I have ever seen, but that’s not necessarily a bad thing.

While it goes without saying that the coronavirus is horrible (and I think everyone but the most coldblooded of investors would rather it not exist, instead of it boosting their portfolios), given that this is the situation we’re in, the pandemic has produced a very promising environment for many different stocks.

As you’d expect, pharmaceutical stocks are among the most promising, due to their proximity to the disease and it’s potential cure or treatment.

Given this situation, Eastman Kodak Company has made a prudent move: re-branding as a pharmaceutical company instead of remaining as a barely-alive photography company.

It’s a shrewd and so-far successful move that could pay off as the year carries on. While these types of swings in share value are often signs that volatility is high, that doesn’t mean Kodak stock is done surging.