If we revisit a short term income strategy on 3M (MMM) that I wrote about last September, we can see how valuable combining long term investing and short term option trading can be. Here is the original trade I suggested:
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The Options Play
Presently trading at 93.78 I am torn between the stock moving sideways or reversing positions because of its cautious outlook on the economy going into 2013. A channel may range from 94 down to 90.5. The stock presently sits at the top of this channel so I am going to play a move down into the lower end of the trading channel.
- Buy the January 2013 put with a strike of '95.00' (priced at $4.35)
- Sell the January 2013 put with a strike of '92.50' (priced at $3.15)
- Net Debit to Start: $1.40
- Maximum Profit: $1.10
- Maximum Risk: net debit
- Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Stock is slowing & looks like it may consolidate for awhile.
- Bleak outlook in 2013 may also keep the stock sideways for awhile.
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Closing out the trade now, here are the results:
- Sell the January 2013 '95' put: $7.40
- Buy the January 2013 '92.50' put: $5.30
- Gross Profit: $2.10
- Gross Profit ($2.10) - Net Debit ($1.40)= $0.70 net profit
ROI: 50%
This 50% return ads a lot to a growth oriented portfolio. I thought the stock would move sideways and did not expect the surprise drop, although the markets as a whole took a tumble here. Can 3M stabilize now?
Analysts
3M Companystock had its "hold" rating reaffirmed by Deutsche Bank in a research note issued on Monday. They currently have a $94.00 price target on the stock. The analyst wrote:
"We see limited upside potential to valuation due to economic weakness in Europe, moderating growth trends in emerging markets, and a more challenging path toward achieving the company's growth targets following the departure of an intensely innovation-focused CEO."
3M posted a 6.7% rise in third-quarter profit, helped by stronger margins, but revenue missed expectations and the company reduced its 2012 guidance. Robert Broens wrote an article on Seeking Alpha recently on 3M and talked about how the slow economy has hampered the large company. He wrote about the third quarter results of the company that fit right into the pattern of what is happening in the markets. He writes:
"Profits rose 6.7% to $1.16 billion on the back of cost cutting and a good performance of materials used in cars and planes. Earnings per share rose from $1.52 last year to $1.65 per share over the past quarter."
Let's not forget that revenue fell short of analyst expectations like most other companies. With a limited upside potential and decreasing revenue, earnings will have to eventually level out and catch up with revenue. This means a decrease. With no positive catalyst out there to lift the company up in the near future, I am expecting it to continue a journey down. For this reason, I would look at a short term income play-following the bears but would wait a bit longer on a long term investment.
(click to enlarge)
Technically Speaking
Even though the stock fell along with the rest of the market 2 Fridays ago, it has been on a steep decline since then. The drop has been as dramatic as it continues to slide along the bottom Bollinger Band-but also pushing through it. This is dramatically bearish. The RSI indicator has given me a negative divergence which is always a good sign of a reverse trend taking place. It signifies a slowdown in the strength of the bullish movement and a near reversal when supported by other indicators. The MACD just so happens to support the RSI with downward movement also. Is the stock going to form a foundation now, or will it continue down. I am sure that it will slow down now because it cannot keep up the hectic pace.
The Options Play
The stock is presently trading at 87.54 and I am apt to look for a short term income trade on the bearish side since I have made good on the last trade and the stock will continue in this direction.
- Buy the January 2013 put with a strike of '87.50' (priced at $3.15)
- Sell the January 2013 put with a strike of '85.00' (priced at $2.04)
- Net Debit to Start: $1.11
- Maximum Profit: $1.39
- Maximum Risk: net debit
- Maximum Length of Trade: 3 months
Reasoning behind the Trade
- Loss of revenue continues to plague the third quarter leaning bearish.
- Follow the recent trend.
- I see no catalyst turning the stock around in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
