Eastman Kodak Turns a Corner

In July, I wrote that Eastman Kodak was well on its way to recovery. Their earnings yesterday, confirmed this trend. Sales of digital products increased 12% to $1.59 billion, making up almost 60% of Kodak’s total revenues for the quarter. Additionall, revenues from their traditional film-based business fell 16%. Both these trends are great for their long-term success. Net income came in at $37 million compared with a year-earlier loss of $37 million, or 13 cents a share. Excluding restructuring charges (which were also lower than expected), profit came in at 45 cents a share, nearly double Wall Street’s expectation of 23 cents, according to Reuters Estimates.

With new products rolling out every quarter, technology improvements in their consumer products, enhancements to their commercial offerings, lower restructuring costs, and strong institutional ownership, and a good chart pattern that reflects the stock has bottomed.

Since my recommendation, the stock has been dead money and been moving sideways. But this should come as no surprise, after all, I did mention that patience would be required since EK is not a momentum stock. The company needs to complete its turn around, and then we can expect a move up.

— Faisal Laljee
Full Disclosure: I own EK, but my position can change anytime without notice.

Eastman Kodak is Well On Its Way to Recovery

Eastman Kodak (EK) is a great brand. It is to pictures what Xerox is to copying. A few years back, the company seemed to have lost its way with its lack of investment in digital cameras and heavier focus on disposable cameras and film. Since then the company has shifted its strategy towards digital photo products and commercial printing. Even then, 6 of the 10 analysts that follow this stock rate it a sell, while the remaining 4 are neutral on the stock. Over 14% of the float is currently being shorted and the company has loads of debt.

However, Kodak does generate over $1 billion in free cashflow annually and has some high profile following and ownership in Bill Miller of Legg Mason, Brandes Investment, Templeton Global Advisors and Private Capital Management. All these entities have a combined stake of 54% in EK, which is probably why the stock is up 50% in a year. Its top billing is its potential for high free cashflow once it is done restructuring by 2008. On June 14th, EK broke out of its 7-month base on more than 4 times its average volume on the news of a new technology that would enable capturing sharp pictures in bad (dim) light. Following the breakout, Kodak finalized the sale of its Light Management Films business – part of its restructuring towards digital photography.

Kodak is not the most exciting company but I believe patient investors will be rewarded handsomely. I recommend buying at current levels.

— Faisal Laljee
Full Disclosure: I do not own EK but my position can change anytime without notice.

Buy the Worst of Barron’s 500

Every year, Barrons publishes a ranking of the top 500 companies. A subsidiary of Credit Suisse (Holt) is the entity that has come up with the methodology for these rankings. I will not bother to explain the methodology since the point of this post is not to critique nor endorse these rankings. Rather, I looked at the last 3 years (2004, 2005 and 2006) rankings, and came up with some interesting observations that I wanted to share.

I examined the Top 10 and the Bottom 10 stocks from each of the lists over the last 3 years, in other words, stocks ranked 1 to 10 and 491 to 500. What I noticed was that the best performing group of stocks over the 3 years were those ranked 496 to 500 – the 5 worst ranked stocks.

Indeed, these worst 5 stocks from the lists of 2004, 2005 and 2006, yielded investors 45%, 32% and 12.5% respectively in the 52 weeks that followed the date the rankings were published. Over the three years, this was the best group to invest in.

Another interesting fact was that the second best performing group to invest in, was the group ranked 491 to 500 – the 10 worst ranked stocks. Over the three years mentioned above, this group returned 30%, 18.5% and 18.5% respectively.

Considering that 2004, 2005 and 2006 were all bull years when the S&P returned 8%, 2.5% and 13% respectively, one would have thought that the worst 5 or 10 stocks in the Barrons rankings would underperform the S&P 500 somewhat, let alone outperform the top 5 and top 10 stocks. But if you look at the 52-week performance of these bottom tier stocks leading up to the publish date of the rankings, they lagged the top ranked stocks by a huge margin. In fact, leading up to the rankings, the Top 10 ranked stocks each year were already up 83%, 31% and 56% respectively over 52 weeks. Compare this to the Bottom 5 ranked stocks which were down 23%, 8% and 7% respectively over the same period.

In other words, stocks that have had strong performance leading up to the Barrons 500 Rankings issue tend to be ranked at the top, even though these stocks hardly ever replicate their big move after the rankings. Meanwhile, stocks ranked at the bottom are ranked so on the heels of underperformance, and turn out to be solid value plays in the weeks following.

The tables below illustrate my point:

*BOY above shows gains/losses from the beginning of the year to date of publishing.

*EOY above shows gains/losses from the date of publishing to year end.

If I include 2003, the numbers are even more stellar. The Bottom 5 of 2003 returned an average of over 71% in 52 weeks after the rankings were published, while the Top 5 returned a more normal 34%.

If history is right (which it seldom is), and the bottom 5 or 10 stocks are the top performing basket, then for the 52-weeks following the release of the 2007 Rankings on May 14th, the following stocks should outperform the market:

Magna Int’l (MGA)
Gap (GPS)
Ford Motor (F)
Tech Data (TECD)
Performance Food Group (PFGC)
Sanmina (SANM)
Solectron (SLR)
Eastman Kodak (EK)
Computer Sciences Corporation (CSC)
BlueLinx Holdings (BXC)

This is just one way to build your portfolio if you don’t know what to buy.

— Faisal Laljee

Full Disclosure: I own none of the stocks mentioned above but my position can change anytime without notice. For the analysis of 2004 rankings, I excluded Winn-Dixie Stores which were ranked 499, and included Union Pacific instead, which was ranked 490. This is because data on Winn-Dixie was limited.

I also want to mention that this post is in no way affiliated with Barrons. All numbers presented here are based on my calculations and have not been published or acknowledged by Barrons.