3M Company (MMM) has done well as a conglomerate this year. From a low of about 67.5 in October 2011, it has fought its way up to close to 90, trading in the '88' range. More and more analysts are favoring this company and there are some good reasons for this. The company is showing good fundamentals and continues to move up. It is worth considering for a long-term investment but also offers a nice short-term income strategy.
JPMorgan Chase & Co. (JPM) Loves 3M
JPMorgan is the latest analyst to find favor with 3M, upgrading the company to "overweight" with a price target of $103, while it presently trades at 87.86. Obviously JPM is pretty bullish on the stock considering it is looking for a price increase of 17.2%. 3M had a unique quarter, while earnings are rising but revenue is falling for most companies. It saw an increase on both accounts. The company's revenue for the quarter was up 2.4% on a year-over-year basis. Analysts expect 3M Company to post $6.37 EPS for the current fiscal year. Morgan Stanley noted that the company is leveraged to benefit from an eventual recovery in the electronics sector, as well as in emerging markets.
JPMorgan is not the only analyst that likes the stock. According to ETF Channel, 3M Company is the #18 broker pick, on average, out of the 30 stocks making up the Dow Jones Industrial Average and has been named as a Top 25 "Dividend Giant" with a staggering $2.14B worth of stock held by ETFs.
Fundamentally, the company is very strong. Look at a summary of these facts:
- MMM has strong revenue growth that is better than the industry average, increasing by 2.4%
- Successful debt management can be seen through its "lower than industry" .03 ratio
- Its return on equity is improving and significantly exceeds the industry average (26.48 to 19.27)
- The net profit margin of 15.00% is above that of the industry average.
I have seen this same pattern before. While the highs and lows are getting higher in a peak and valley formation between the Bollinger Bands, one only needs to look at the RSI and MACD indicators to see another sign. If you look at the RSI, it is easy to see that the last high did not have as much strength because it did not move higher. This is the beginning sign of weakness. If you look at the MACD also, there is a highly visible negative divergence taking place between the MACD MA's and the histogram. This confirms the weakness in the uptrend we have seen in the RSI and makes it more pronounced.
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This is also known as a "head fake" or a "bull trap." This "head fake" happens as many investors invest in the breakout. They encounter this notorious breakout fake. Here, just as the market appears to be rapidly breaking out from a consolidation channel, it reverses and turns back into the channel. Nothing is more frustrating for the trader who has conceived of a breakout strategy ahead of actual price action and then had a trade fail miserably from a breakout head fake.
The Options Trade
- Buy an October 2012 put with a strike of '87.50' (priced at $3.50)
- Sell an October 2012 put with a strike of '85.00' (priced at $2.48)
- Net Debit to Start: $1.02
- Maximum Profit: $1.48
- Maximum Risk: net debit
- Maximum Length of Trade: 3 month
Reasoning Behind the Trade
- Weakness in the move up is well documented so looking for a pullback instead of continued climb.
- Markets overall are unfavorable toward bullish tendencies.