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The 10-K Hall of Shame


Big bets on single stocks can lead to huge gains — or financial ruin.

With the benefit of hindsight, the stock market makes perfect sense. Of course the rise of the Internet in the 1990s would be an economic boon. Of course credit markets were horribly overextended in 2008, resulting in a massive correction.

The same holds true at a micro level as well. In hindsight, the overwhelming challenges of companies that have gone belly up seem obvious. But at the time, the naive outlooks and ultimately disastrous business plans made sense to management and to investors. Although more inspired leadership may have saved some of these companies, incompetency alone isn’t to blame. Sometimes the innovations and macroeconomic events that disrupt companies or even entire industries seem to happen overnight.

Below is a look back at insights from eight companies’ SEC Form 10-K annual reports that seemed to show that they were racing ahead. Little did they know that they were actually about to fall off a cliff.

Borders Group: Superstore or Bust!

In early 2005, Borders was blissfully unaware of the looming threat posed by Amazon. In the annual report that year, the company acknowledged struggles, but sounded confident in its plan to double down on brick-and-mortar bookstores.

The Company’s growth strategy is dependent principally on its ability to open new superstores and operate them profitably. The Company has been engaged in an aggressive expansion and remodel program, pursuant to which it has opened 19 domestic superstores and completed major remodels of 33 existing domestic superstores in 2004.

In hindsight, the notion that Borders could be saved by building more superstores is comical. But that’s exactly what investors bet on at the time. In 2007, the first Kindle hit the market. By 2010, Amazon’s e-book sales surpassed paperback sales for the first time. In February 2011, Borders filed for bankruptcy.

Motorola: More RAZR!

Photo credit: Dante Alighieri

Once upon a time, Motorola was on top of the tech world. In the 2005 annual report, the company celebrated the massive success of its RAZR phone, which had sold more than 23 million units at the time.

We remain committed to delivering compelling products in all our businesses. We will continue to build on the success of the MOTORAZR with ultra thin products, including the introduction of the QWERTY design known as the Q, in 2006.

A few months earlier, Motorola CEO Edward Zander was euphoric after Motorola smashed earnings expectations on the strength of strong RAZR sales. In response to an analyst question on the future of the company, Zander offered a simple vision.

What’s next? More RAZR.

In June 2007, Apple launched the first generation of the iPhone. Five months later, Zander announced his resignation. Google acquired Motorola Mobility in 2011, paying $12.5 billion in a transaction primarily to acquire the company’s portfolio of patents.

Kodak: What Technology?

Photo credit: Vincenzo Reina

A few excerpts from the 2005 annual report highlight how Kodak failed to grasp how digital photography would change the way consumers and businesses take and share photos and videos.

Some aspects of the consumer imaging business don’t change with the technology. People still want simple solutions that will let them take, share and control pictures of their lives. Kodak is committed to providing new capabilities, while staying true to the “you press the button, we do the rest” simplicity on which our company was built.

While acknowledging that the company faced challenges, management also pounded its chest over what it viewed as some major accomplishments. Specifically, the report celebrated that Kodak was:

  • #1 worldwide in snapshot printers, competing against the specialized printer companies.
  • #1 in retail photo kiosks, with nearly 75,000 installed worldwide — far ahead of our nearest competitor.
  • #1 in online services with the Kodak EasyShare Gallery, which today has more than 30 million registered members.

Although in the middle of a storm, management told investors of brighter days ahead.

Staying true to our strategy, by 2008 we expect all of Kodak’s businesses to be leaders in their industry segments — achieving attractive margins and generating substantial cash…It is truly an exciting era for Kodak.

These celebrations and predictions seemed appropriate at the time. In hindsight, they are comical. Kodak spent the next several years selling off businesses in order to raise capital. In 2010 the company was booted from the S&P 500. In 2011 shares fell more than 80 percent and hit an all-time low of $0.54 per share. In early 2012, the company filed for bankruptcy protection.

Krispy Kreme: Doughnuts Forever!

Photo credit: Mark Lee

In 2003, Krispy Kreme was flying high. The stock had gained more than 200 percent since its IPO in 2000, and new stores were opening on a weekly basis. In the 2003 annual report, management saw even better days ahead.

We expect doughnut sales to continue to grow due to a variety of factors, including the growth in two-income households and corresponding shift towards foods consumed away from home, increased snack food consumption and further growth of doughnut purchases from in-store bakeries.

The future seemed as bright as the signature “Hot Doughnuts Now” sign, but some unforeseen challenges awaited. The following words were never mentioned in the 2003 annual report, but would weigh heavily on KKD shares in the following months:

  • Carbohydrates
  • Diet
  • Healthy
  • Organic

Krispy Kreme stock was hammered by the low-carb craze that swept the country, and still trades below prices hit in September 2000.

New York Times: Hooray Internet!

Photo credit: Haxorjoe

In 2003, the newspaper industry was about to undergo a drastic change that would result in numerous bankruptcies and consolidations. The New York Times’ 2003 annual report, however, hardly acknowledged the role of the Web in the news industry. In listing its primary competition, the Internet barely beat out “other media.”

The Times also competes with magazines, television, direct mail, radio, the Internet and other media.

If anything, the Times was thinking of the Web primarily as a source of new delivery customers.

The reach of the Web sites is instrumental in creating a substantial stream of newspaper subscription orders each year.

At the time, management was much more focused on managing the costs of newsprint (57 mentions in the report) than the pesky Internet (10 mentions).

One of the Company’s key management priorities is to anticipate the level of advertising volume and newsprint prices while it manages its businesses to maximize operating profit during expanding and contracting economic cycles.

Beginning in 2004, NYT stock collapsed as intense Web competition eroded the subscriber and advertiser bases. The stock remains about 60 percent below its 2003 price.

General Motors: Oops!

The automotive industry was rocked in 2005 when the unthinkable occurred: gas prices increased. The companies that had cashed in for years on strong sales of SUVs and trucks were suddenly scrambling to stay afloat.

Within a few months, carmakers saw sales collapse and their ongoing existence called into question. Excerpts from GM’s 2004 and 2005 annual reports highlight just how quickly things changed in Detroit during the year.

On the Company’s Outlook:

On the Company’s Goals:

On Health Care Costs:

On Fuel Efficient Vehicles:

On Hummers:

On Marketing Plans:

On Integrity:

CEO Rick Waggoner struck a positive tone in closing his letter to shareholders in 2005.

I am confident that we’ll emerge from these challenging times stronger, smarter, and a better global competitor.

Unfortunately for GM, the challenging times were far from over. In its bankruptcy filing four years later, GM noted $82 billion in assets and $173 billion in debt.

Blockbuster: DVD Dynasty!


In hindsight, buying Netflix for $50 million in 2000 probably would have been a wise move for Blockbuster. But the company was bullish on a long future for the DVD, and excited about its positioning within that market.

In the 2005 annual report, management saw a growing DVD business.

[W]e believe that the DVD format will drive continued growth in the retail home video industry due to increasing popularity of in-home theater systems and related enhanced viewing and sound capabilities, and the anticipated launch of high-definition DVD…We also believe that there are continued opportunities in the consumer market for used DVDs.

Four years later, the focus was still on DVDs. From the 2009 annual report:

Our by-mail program allows subscribers to select DVDs online, which are then shipped to them free of charge by U.S. mail. Once a subscriber has finished viewing the DVD, the subscriber may return the DVD via mail using the postage prepaid envelope that accompanied the DVD or at a participating BLOCKBUSTER store.

Blockbuster filed for bankruptcy in 2010, and closed the last 300 of its remaining stores in 2014.

Lehman Brothers: More Credit Sales!

Photo credit: sachab

A few months before it became one of the largest bankruptcies in U.S. history, Lehman Brothers was optimistic about the future. The following comes from the 2007 annual report.

We greatly appreciate the continued support of our clients and shareholders. We have never had a more diversified set of businesses or a stronger base of talent. As we enter 2008, we are proud of how far we have come and excited about the opportunities ahead.

In the midst of the recession, and only months before their collapse, Lehman Brothers touted their risk management capabilities.

Amid unprecedented credit market dislocation and weakening global growth, clients increased the amount of business they do with us. One measure of how we delivered for our clients, Fixed Income sales credit volume, rose 40% in 2007. More than ever, we believe, our risk management capabilities, strategic advice, and support across cycles has been of significant value to our clients and partners.

Less than one year later, Lehman Brothers’ stock collapsed and the company filed for bankruptcy.

Diversify, Diversify, Diversify

Much of the commentary around ETFs in recent years has focused on the nuances of the structure and the precise differences between various methodologies. Often overlooked is perhaps the most meaningful benefit of using ETFs in a portfolio — efficient diversification across a broad basket of securities.

Investors tend to underestimate the volatility of individual stocks. A big bet on a single stock seems brilliant when the company exhibits Apple-like growth. When the company implodes, however, investors who placed big bets can experience financial ruin. History is full of events that management and investors never saw coming; seemingly strong, unstoppable companies can be decimated virtually overnight, wiping out portfolios in the process.

About the Author: Michael Johnston

Michael Johnston is senior analyst for ETF Reference, and also serves as COO of parent company Poseidon Financial. His investment expertise has been featured in The Wall Street Journal, Barron’s, and USA Today, among other publications. He resides in Chicago.