Editor’s Note: This article was updated and corrected on June 28.
From a broader perspective, industrial and applied-science behemoth 3M (NYSE:MMM) is a perplexing investment. On one hand, the company represents an indispensable presence in our lives. Whether we’re talking about the workplace or home, 3M’s products have directly impacted us. On the other hand, this implied demand shows up nowhere in the 3M stock price.
The big moat, slow growth narrative hasn’t changed for several years. But earlier this year, MMM stock appeared to have found a reprieve from its troubles.
Unfortunately, a huge miss for its first quarter of 2019 earnings report hemorrhaged its market value. Management’s disappointing outlook for the rest of the year topped off a bleak day for the company.
If that wasn’t bad enough, economic relations between the U.S. and China hit a low point in early May. That immediately plunged the 3M stock price. The bears piled on, however, forcing shares into an ugly bearish trend channel. It wasn’t until earlier this month that 3M finally stopped the bleeding.
I’m not going to turn into an apologist for the industrial giant, as I understand why many gave up. With a dramatically slowing revenue trajectory, MMM stock desperately needed an open pathway to China. Without it, the market valuation appears ridiculously expensive.
That said, I felt with the severe drop that 3M stock offered something for contrarians. First, the company made a strong push into the lucrative wound-care market with the Acelity buyout. I also felt optimistic about a U.S.-China trade deal.
However, events really didn’t pan out like I envisioned. So how should investors approach MMM stock now?
Near and Long-Term Outlook for 3M Stock
If you’re approaching shares as a speculative trader, the game plan for MMM stock is fairly straightforward: you’re looking to capitalize on a reactionary bounce.
From a purely kinetic angle, the 3M stock price has shed nearly 21% since right before the Q1 earnings disaster. That is a sizable chunk for a blue-chip stalwart. Since you don’t see massive swings on either side of the fence for Dow Jones companies, a risk here doesn’t seem like a bad idea.
Another compelling point to consider is the options market, which is signaling a high level of implied volatility. In English, that translates to traders anticipating a big move in the 3M stock price in either direction.
But where? That’s the million-dollar question. Basing off a combination of human psychology and market patterns, you’d expect at least a dead-cat bounce.
Where things get tricky is the longer-term view. I think a picture comparing 3M’s quarterly revenue to share price is very helpful.
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Even from the first few years of this decade, it was clear that the company’s revenue growth had peaked. But because we were getting out of the Great Recession at the time, MMM stock didn’t immediately price in the added sales. Shares later accounted for the sales bump throughout 2013 and 2014.
But the problem was that 3M stock continued to rise higher despite no substantive improvement in the revenue-growth curve.
Comparing revenue and share price is only one way to assess the situation. Still, I can’t help but notice that MMM stock looks a bit overvalued relative to the sales output. What this tells me is that shares need a perfectly clear road ahead. Recent developments suggest I shouldn’t hold my breath.
Differing Approach to MMM Stock Depending on Your Timeline
Again, I’m going to go back to my earlier point: if you’re a trader (translation: you have a short timeline), MMM stock looks pretty interesting. Having incurred substantial volatility already, you have got to assume another round of bearishness won’t strike so quickly.
However, if you’re looking for a buy-and-hold investment, 3M stock requires a strong stomach. I say this because the underlying company really needs China. Without it 3M looks glaringly vulnerable.
I’m also not sure what’s going to happen with this trade deal. Suppose President Donald Trump and Chinese President Xi Jinping make a deal at the G20 summit. Will it last? After suffering multiple foreign policy embarrassments, Trump can’t afford to look weak.
I think his holding of a “Plan B” regarding China tells you all you need to know. MMM stock has some good stuff to offer, but geopolitics plays a big role here.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
