Courtesy of Vitaliy Katsenelson.
Investment mistakes usually fall into one of three categories: analysis, behavior or bad luck. In October 2011, after the shares of Hewlett-Packard Co. had been halved from about $48 earlier that year, I made a case for the stock. That was a mistake. There was no bad luck. I made several errors in my analysis. In this column I want to drill down into my mistakes and provide a new analysis of what is still an attractive investment.
In 2011 I got three things wrong about HP: printers, services and culture. To better understand the company, it’s helpful to use an analytical framework based on two companies in different time periods: computer maker IBM Corp.circa 1993 and film giant Eastman Kodak Co. since 2006.
Kodak was responsible for pioneering work in digital photography as early as the 1970s. In the ’90s, when digital photography was introduced commercially, Kodak’s 35mm film sales at first continued to grow, as digital cameras were an expensive novelty. But as digital cameras got better and cheaper, and thus more popular, sales of 35mm film started to decline. If you were a value investor analyzing Kodak, the stock would have appeared cheap on past earnings. And if you assumed that Kodak’s cash flows would gradually decline years into the future, you’d have been dead wrong. Kodak turned into the value trap of all value traps. Once digital cameras went mainstream, Kodak’s sales went off a steep cliff, falling from $13 billion in 2006 to $5 billion today. Cameras are replaced every few years, and the cost savings from not buying expensive film any longer were substantial. Also, the new digital cameras were simpler, and the learning curve was not steep.
