Industrial conglomerate 3M Company (NYSE:MMM) got some love from investors – albeit brief – when the coronavirus outbreak initially started, stoking sales of surgical masks made by the Minnesota-based company, boosting MMM stock along the way.
Any ebullience ascribed to the name via coronavirus-related surgical mask demand was short-lived, as highlighted by the fact that MMM stock is lower by 16.50% month-to-date and almost 24% this year. Moreover, the stock is sporting bearish tendencies and has been doing so for over a year. Over the past 12 months, 3M is off 35.52%, double the Dow’s loss over the same period.
In theory, the coronavirus should salve weary MMM investors. The pandemic is creating fresh demand for the company’s products, sentiment extending beyond the aforementioned masks.
“Global demand for supplies used to treat and help protect people, such as respirators, is currently exceeding supply. 3M expects demand for respirators to outpace supply for the foreseeable future,” according to the company. “3M is ramping up production at its manufacturing facilities around the world including in the U.S., Asia, and Europe as quickly as possible.”
Unfortunately, 3M stock isn’t reflecting a company that’s supposedly experiencing insatiable demand for some of its products. Let’s put it this way. Does anyone think that if Apple (NASDAQ:AAPL) said it was selling more iPhones than it could produce that its stock would be down 16.50% in half a month? No, it would not.
A case can be made that the COVID-19 pandemic is actually presenting a significant risk for 3M due to increasing chatter that the U.S. is either close to or officially in a recession. MMM is classified as an industrial stock, meaning it’s in a cyclical sector known to underperform during economic contractions.
In four of the prior five recessions – 1973-1975, 1980-1982, 1990, 2001 and the global financial crisis – the industrial was either a laggard or merely performed inline with the broader market, according to McKinsey. Alright, so that’s a statistic about events in the past. Let’s assume that the U.S. economy is currently in a recession, but that it’ll be a shallow one with the business climate bouncing back in the second half of the year.
Even if that happens, it’s not necessarily an elixir for 3M shares. The aforementioned McKinsey study notes that it took a while for the industrial sector to accrue momentum in the recoveries following the prior recessions, and that sector is rarely a leadership group following contractions.
One way of looking at that scenario is that if 3M is one of the stocks currently piquing your interest, it could be worth waiting on because if history repeats, prices are likely to come in even more if a recession materializes.
For what it’s worth, analyst ratings on the stock reflected pessimism as just about 10% of those covering the company rate it the equivalent of a “buy.”
Bottom Line on MMM Stock
For longer-term investors, one potentially instructive lesson with 3M is that it’s a value stock, putting it in a group that was hammered during the most recent bull market. However, it has been growth stocks that have been bludgeoned in the most in the new bear market, potentially signaling value is about to shine again.
Plus, 3M is a steady dividend payer and grower with a yield of 4.37% with other sources of allure for patient investors.
“While we expect near-term headwinds will continue in 2020, we believe the company can grow its top line nearly 3% organically over the next five years, with another point from acquisitions,” according to Morningstar.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.