I'm often asked how I know which companies to avoid – like the plague – or "sell short" in the name of big profits.
"You seem to have it down to a science," said Barbara P. and her husband, Robert, over coffee in Seattle recently…
Fitbit Inc (NYSE:FIT) at $16.97 before it fell 71.66%…
Sears Holdings Corporation (NASDAQ:SHLD) at $144.86 before it fell 98.4%…
GoPro Inc (NASDAQ:GPRO) at $86.97 before it fell 94.5%…
They'd come to check out the original Starbucks Corp (NASDAQ:SBUX) location in Pike Place Market after hearing me talk, during an appearance on "Varney & Co." a week ago, about why I think the company is in for some rough sledding in the months ahead.
"Science may be pushing it, but thank you for the compliment," I said… and I added that "the real secret is psychology."
Let me explain…
Logic Doesn't Apply When Emotion Takes Over
Market psychology is the feeling investors develop that compels them to buy or sell specific stocks. It's very different than technical knowledge or even a hot tip.
What I'm talking about is the emotional driver that prompts 'em to buy or sell. The former is usually an expression of optimism, while the latter is usually a reflection of inner fear. Either way, logic goes right out the window.
The key to big profits when this happens is finding companies where the two – logic and emotion – are at odds.
Take Eastman Kodak Co (NYSE:KODK), for example.
The company is an unmitigated disaster and has been for decades because it missed the transition to digital photography despite the fact that it created much of the technology driving it today.
Not many people know, for example, that Kodak actually invented the first megapixel camera in 1986. That should have given them a huge lead because they were years ahead of the competition, but it didn't because executives failed to grasp the earth-shattering potential.
Here's another surprise… Kodak actually spent more than half a billion dollars in the mid-90s to develop the first digital preview cameras yet held back because management feared that releasing that technology would eat into the film business.
Other critical failures followed, including the misguided purchase of Sterling Drug in 1988 and a series of CEOs who just couldn't grasp the inevitability of digital images, much in the way former Microsoft (NASDAQ:MSFT) CEO, Steve Ballmer, failed to understand Apple (NASDAQ:AAPL)'s iPhone when the late Steve Jobs unveiled it. (Which he ridiculed in this now famous clip from 2007.)
Kodak even purchased a photo-sharing site called Ofoto in 2001. That should have been an amazingly profitable springboard that allowed them to dominate today's social media a la Instagram or Twitter!
If you're like most investors, you're asking yourself… Ofoto???!!!!
My point… exactly.
Kodak has repeatedly made some really intelligent breakthroughs over the years only to shoot themselves in the proverbial foot every time.
Sales have fallen from $10.3 billion in 2007 to only $1.53 billion a decade later to 2017. Net income, over that same time frame, has dropped from $676 million to a staggering $94 million – a loss of 86.09% in a decade.
The company's stock has fallen by more than 60.1% in the past 12 months alone and a jaw-dropping 80.7% over the past five years during one of the biggest bull markets on record.
I think it'll hit zero in the next six months.
Psychology Is Your Key to Big Profits Ahead
That's where psychology comes in.
The investing public is so preconditioned to the notion of cryptocurrencies that the merest mention of 'em causes otherwise rational investors to drool like Pavlovian dogs and to buy stocks they know damn well are worthless. And, with predictable results.
Any number of shoddy companies have instantly enjoyed a change in fortune overnight by adding "blockchain" to their name or hatching plans for some sort of cryptocurrency tangent. Then, they fall from grace as quickly as they rose.
That was the case for the unprofitable Long Island Iced Tea Corp. when it rechristened itself as "Long Blockchain Corp" (OTC:LBCC) and shares jumped 289% overnight, according to Bloomberg. The company now trades in the OTC market at $0.42 per share, having fallen 96.41% from an April 2018 peak of $11.70.
The situation reminds me of the Dot.com era. Companies that had nothing to do with the Internet could suddenly carry multimillion-dollar valuations merely by putting out a press release saying that they intended to become an Internet company.
See the mismatch?
This is investor psychology at work, and it's why Kodak stock jumped from around $3 to $11.55 in January when management announced the company was getting into the cryptocurrency business via KODAKCoin, KODAKOne, and KODAK KashMiner. And, now, it's back to $3.73 a share, as I type.
Kodak's move is nothing more than a publicity ploy at a time when the investing public is highly likely to fall for it.
Worse, the once rock-solid company has now apparently gotten into cahoots with a paparazzi photo agency, a penny-stock promoter who's been fined $25,000 and banned from Canada's Alberta Stock Exchange, and a company offering a "magic money-making machine," according to The New York Times.
I think Kodak will be bankrupt by the end of the year (again), and no amount of digital hocus-pocus will change that. Shares are worth zippo.
So, now what?
First, Kodak's still a great short if you want to get in on the action.
Most of the easy money has been made, however, which means the final fall from $3 a share to $0 will be volatile. The last holdouts always hate giving up the ghost more than they hate admitting defeat.
That's actually great for our purposes because each false rally is a chance to "get short."
Imagine if you'd gone short at around $12 when Kodak's announcement hit the wires and shares jumped to a peak of $13.28 on Jan. 10, 2018. You'd be sitting on a quick 69.16% in just six months.
Second, you can buy put options – a speculative bet that Kodak's stock will fall. The advantage, of course, is that your risk is limited to the amount of money you invest versus shorting the stock itself, in which case the risk is technically unlimited.
In this instance – where the trade is based on psychology – put options are a lot like a lottery ticket. You can spend a little and potentially win a lot!
Still, the smart money knows what's coming, which makes me more than a little suspicious about the way open interest is concentrated in the KODK Aug. 17, 2018 $2.5 puts (KODK180817P00002500) and KODK Oct. 19, 2018 $2.5 puts (KODK181019P00002500), with 3,749 contracts and 845 contracts, respectively. That tells me that somebody – probably an insider – knows something material about Kodak's next move that isn't public yet.
What I'd rather see you do is get on board with the next opportunity.
I'm actually researching three companies with an exceptionally high risk of financial failure right now – all of which have the kind of potential for ginormous returns we've talked about today.
And, I will be back with those in the coming few weeks.
Social Security Accounting Errors Leaves Tens of Thousands Underpaid
If you're looking for another reason to be upset with the government, look no further… Audits done by the Office of the Inspector General found that errors by SSA employees have resulted in 33 years of underpaid benefits to tens of thousands of Americans.
Imagine how impactful one minor mistake can be in your everyday life; take that multiplied by 33 years… No wonder research found that Social Security recipients are leaving an estimated $25 billion dollars in the pockets of the U.S. government every year.
That is the equivalent of $825 billion dollars within that same time frame…
Denise Felton, for example, recently found out she was underpaid $56,255 in Social Security due to the same type of miscalculations.
I don't know about you, but I'm certainly not going to sit and let the government keep another cent of my hard-earned cash.