Well, Eastman Kodak (EK) is having one picture-perfect trading session. At the time of this writing, shares of the photography concern, whose colleagues include Canon (CAJ) and Sony (SNE), were up over 16% on high volume. Yes, it's Kodak I'm talking about, the low-priced equity that many have written off as an investment idea. The reason for all the buying action? Fourth-quarter numbers. Were they that good?

Sales increased 6%. On a GAAP basis, Kodak made $1.36 per share from continuing operations. This compares to a loss of $3.40 per share booked in the year-ago period. According to Reuters, the non-GAAP number was $1.08 per share, beating the estimate of 18 cents by what is obviously a very wide margin.

Eastman Kodak (NYSE: EK), which counts Sony (NYSE: SNE) and Canon (NYSE: CAJ) as related companies, continues its slide into fundamental hell. According to the third-quarter earnings release, sales declined a scary 26%, and a GAAP loss of 41 cents per share was reported. Last year at this time, Kodak produced positive income of 35 cents per share. According to Reuters, the adjusted loss of 23 cents per share was worse than analyst projections. Wall Street was hoping for something closer to a loss of 19 cents per share.

Don't you get the feeling management just doesn't know what to do? Kodak has become a conundrum of epic proportions. Just how is someone supposed to improve a situation that has gone so downhill?

Eastman Kodak (NYSE: EK - option chain) stock is trading lower today after the company announced yesterday evening that it will offer $300 million of convertible senior notes due 2017 in a private placement to qualified institutional buyers. Additionally, the private equity fund Kohlberg Kravis Roberts & Co. will buy up to $400 million in notes due in 2017 in exchange for two seats on EK's board of directors. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on EK.

This morning, EK opened at $6.34. So far today the stock has hit a high of $6.34 and a low of $5.81. As of 12:15, EK is trading at $6.16, down 52 cents (-7.8%). The chart for EK looks bearish and S&P gives EK a negative 2 STARS (out of 5) sell ranking.

Investors continued to sell Eastman Kodak (NYSE: EK) during the second quarter, and shares bottomed at $2 per share.

Looking forward, I recently added Eastman Kodak to my Penny Stock Winners model portfolio as a buy recommendation.

In my opinion, the carnage at Eastman Kodak has been complete and the upside benefit of the digtal revolution is worth the speculation. The company may never fully recover from the last few years, but a small improvement in operations can result in big gains in the stock.

I would be a buyer of Eastman Kodak at these prices.

Next: Stock to Avoid #10

With such uncertainty, following an absolute return strategy continues to offer investors the biggest bang for their buck. There is no sense in guessing where the market will be down the road.

Instead, buy cheap stocks and sell stocks that are expensive. Then blend the two approaches together in one portfolio and chances are you'll make money.

Even with a huge rally in stocks, the S&P 500 ended the second quarter with a year-to-date gain of 1.78%. That is a vast improvement compared to the 11% loss at the end of the first quarter, but it's a minimal return for taking risk in the stock market.

Investors need to do better -- and they can.

Eastman Kodak (NYSE: EK), whose colleagues include Canon (NYSE: CAJ) and Sony (NYSE: SNE), did not start its new fiscal year with a picturesque first quarter. No, it was more of an ugly, frayed-at-the-edges, nightmarish image of doom and gloom. And although the photography company does have a point when it states right at the beginning of the release that the global economic malaise is affecting its prospects, let's also be realistic. Kodak has been doing badly for a long, long time. This isn't just about the economy. This is about a company that still hasn't properly adjusted to a new, thriving business model.

According to this article, Kodak's adjusted loss of $0.95 per share from continuing operations missed Wall Street's call. By a lot. Some in the analyst community thought that Kodak would lose $0.44 per share. Others thought the company would lose less than even that figure. Doesn't matter what source you look at, the facts in the case make it clear that Kodak is not doing well. Worldwide sales shed just under 30% of their value. The digital segment fared very poorly in Q1.

An investment vehicle owned by Bill Gates reported a 5.2% stake in Eastman Kodak (NYSE: EK) this morning. The investment was disclosed in a form 13-G filed with the SEC, which indicates that the investment is passive in nature: Cascade Investment LLC does not have plans to become involved with the company's operations, or press for governance changes.

Bloomberg reports that the Kodak stake is Cascade's ninth-largest investment.

Eastman Kodak (NYSE: EK) has been struggling for decades, and the current financial crunch is just pushing it further along. Today it announced 4,500 job cuts on a 24% drop in revenue and a restructuring charge of $350 million. Kodak is a classic example of a company whose decades of success make it unable to adapt to change.

First, a look at Kodak's report. With sales down to $2.43 billion from $3,22 billion a year ago, it is cutting its workforce by 18%. This cut contributed to a fourth quarter loss from continuing operations of $133 million, or 50 cents a share -- compared to last year's profit from continuing operations of $92 million, or 32 cents. This report comes at the end of a four-year, $3.4 billion overhaul in December 2007 that eliminated 50% of its workers, or 28,000 jobs. The shakeup was supposed to shift the company's focus to digital products and services from traditional film, but it came too late.

In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.

Be honest -- when was the last time you dropped off a roll of film to be developed? If your response dates back to the 1990s, the unpleasant fate of Eastman Kodak Company (NYSE: EK) probably doesn't need too much explaining. The way we take pictures and use paper has shifted drastically in the past decade, and Eastman has struggled in its attempts to keep up (with more "struggling" than "keeping up" involved, nearly every step of the way).

What went wrong? At No. 11 on our list of SPX dawdlers, EK shed 80% of its value during from June 30, 1998 through June 30, 2008. The stock tapped an all-time high near $95 in early 1997; during the decade in question, the shares peaked at $88.94 in July 1998. It was to be the first in a long series of lower highs for EK as it cascaded down the charts.

Eastman Kodak entered 1998 with an aggressive turnaround plan. The elimination of 20% of EK's payroll was meant to help stem the tide of diminishing profits and market share for the one-time leviathan of photography; the company was floundering in the face of heightened competition from the likes of Fuji. EK also unloaded a chain of retail stores and non-core businesses, but a gradual increase in profits couldn't mask disappointing sales growth.

Paul Krugman's New York Times op-ed tries to defend his Princeton colleague, Federal Reserve Chairman Ben Bernanke. Krugman suggests that inflation is not a problem because he can't find any long-term labor contracts with 11% annual pay increases as in 1981's United Mine Workers contract.

Krugman gets himself into a weak position and he does not disclose his fealty to Bernanke whom he evidently does not believe can defend himself. It seems absurd to pretend that inflation is not a problem. Food prices have tripled and oil prices have doubled as Bernanke cut the Fed funds rate from 5.25% to 2%. Last week Dow Chemical (NYSE: DOW) announced a 20% price increase as did Eastman Kodak (NYSE: EK) in response to rising oil and other commodity prices. Huntsman Chemical (NYSE: HUN) announced a 25% price increase. And consumers -- who account for 70% of GDP growth -- expect inflation to rise at a rate of 7.7%.

Shares of the top maker of photographic film, Eastman Kodak Co. (NYSE: EK), have been tumbling in morning trading after putting up less than impressive earnings.

The company was not able to come in above analyst estimates, despite the fact that its loss narrowed to $115 million, or 40 cents a share in the first-quarter. Compared to its first period last year, its quarterly numbers showed a nice rebound, as the company reported a much higher loss of 53 cents a share last year.The photography products maker improved its performance on digital photography products and services, but this was not enough to offset higher silver and aluminum cost and increased spending on its inkjet printer business.

Going into today's earnings report Wall Street had been looking to see the company show Q1 loss of 3 cents a share. Excluding one-time items, the company stated that it loss came in at 39 cents a share, far more than the loss that analysts predicted. So with the actual numbers, Eastman Kodak is looking for a pretty bad day in today's session.

Eastman Kodak Co. (NYSE: EK) stock is falling this morning after the company announced a fourth-quarter profit of $215 million, or 71 cents per share. Excluding one-time items, the company's profit came to 41 cents a share, missing analysts' estimates of 52 cents a share. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on EK.

After hitting a one-year high of $30.20 in June, the stock hit a one-year low of $16.66 last week. This morning, EK opened at $20.54. So far today the stock has hit a low of $19.85 and a high of $20.91. As of 11:05, EK is trading at $19.88, down $0.57 (-2.8%). The chart for EK looks bearish but improving slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $22.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in 2 months as long as EK is below 22.50 at March expiration. Kodak would have to rise by more than 15% before we would start to lose money.

MAJOR PAPERS:

• Merrill Lynch & Co Inc (NYSE: MER), under intense pressure from billions of dollars of mortgage write-downs may get about a $5B capital investment from Temasek Holdings, a Singapore state-owned investment firm, the Wall Street Journal reported.
• The WSJ also reported that the SEC is investigating how Washington Mutual Incorporated (NYSE: WM) handled and reported on mortgage loans which may have been based on inflated home appraisals.

WEB SITES:

• BusinessWeek's "Inside Wall Street," Eastman Kodak Company (NYSE: EK) is looking to transform from a pariah on the Street into success. The number one photography company has been restructuring since 2003, and analysts expect to see strong profitability and cash flow in 2008.
• Aldabra 2 Acquisition Corp (AMEX: AII) may be another success story, BusinessWeek's "Inside Wall Street" noted, particularly if it gets a boost in output and "possible listing on the Big Board."
• Analysts are bullish on Inspire Pharmaceuticals Inc (NASDAQ: ISPH), BusinessWeek's "Inside Wall Street" reported, which has conjunctivitis drug AzaSite on the market and several drugs in its pipeline. AzaSite sales are expected to come in around $45M next year, but the company could grow further with its cystic fibrosis drug Denufosol, now in phase III trials.

As Brent Archer recently wrote, Eastman Kodak (NYSE: EK) has been one of the most visible sponsors of the Olympic games for years, but it's a partnership that's coming to an end. After the Beijing games in 2008, Kodak will no longer pay the $50 million plus per Olympiad to be the official film and imaging sponsor.

Shares of Kodak have been terrible performers over the past decade as the company faces increased competition in the digital age. The Street appears to approve of dropping the Olympics, and the stock was up more than 5% on the news.

And maybe it is a sensible cost-cutting move -- cost-cutting moves nearly always send a company's share price up. Movie Gallery (NASDAQ: MOVI) soared last month after the rental-chain announced it was closing 13% of its stores, only to tank when bankruptcy rumors emerged on Friday.

Eastman Kodak Co. (NYSE: EK) announced this morning that it will end its Olympic sponsorship following the 2008 Summer Games in Beijing, as they reassess their marketing and attempt to move in a new direction. EK is moving significantly higher today on this news and not much else, so it looks like investors are happy with this move. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on EK.

After hitting a one-year high of $30.20 in June, the stock has up and down sharply within a $2-dollar range over the past three months. EK opened this morning at $27.24. So far today the stock has hit a low of $27.18 and a high of $28.44. As of 10:45, EK is trading at $28.20, up $1.16 (4.3%). The chart for EK looks neutral but improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bullish hedged play on this stock, I would consider a November bull-put credit spread below the $25 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 13.6% return in just 5 weeks as long as EK is above $25 at November expiration. Kodak would have to fall by more than 11% before we would start to lose money.

EK hasn't been below $25 since June and has shown support around $27 recently. This trade could be risky if the company's earnings (due out on 11/1) disappoint, but even if that happens, this position could be protected by strong support between $25 and $27, where EK has bottomed throughout the past three months.

Brent Archer is an options analyst and writer at Investors Observer.