Are we having fun yet? These are turbulent times on Wall Street, so today’s write up is a little different than most. But first, it is imperative that we acknowledge that this virus pandemic is extremely tragic and our thoughts go out to those who are affected by it. I am confident that just like the flu, our medical professionals will get it under control. The discussion for any equities has to start by acknowledging that the stock markets crashed twice this week and today it’s Friday the 13th, so we may not be done yet. Thursday alone delivered a drop of 10% in great stocks like 3M (NYSE:MMM).
Even the Russell 2000, which is a basket of 2000 stocks, fell 11% just yesterday. In total they are down 34% from the highs, so needless to say that Wall Street is in full panic mode.
They are selling everything and blaming the coronavirus from China for the damage. I suggest that the way we reacted caused more of the financial damage than the virus. Do not mistake this statement with the human losses, those carry the highest cost, but the discussion here is to ascertain stocks’ value versus the financial threat. For example, last night, we learned that even the happiest place on earth will close starting this weekend. For example, Disney (NYSE:DIS) announced that is is closing its California parks.
Expect Big Swings On Wall Street Amid Rising Fear
Uncertainty is almost at record highs as the VIX is over 70, so we must expect the unexpected. Mathematically at these levels markets expect a +/-4% move any day.
These are levels we haven’t seen since the 2008 financial crash. Back then we had almost all global banks near imminent collapse and many of them actually died. Now we are dealing with a flu that all experts are confident they will control with a vaccine this year. Luckily, the total number of dead has remained low considering what could have happened, albeit one death is too many. This is extremely tragic but nowhere near the tragedies that happen every year from the regular flu.
This is all to say that this too shall pass and that we need time to come to terms with this new version of the threat. But what could fix stocks overnight is a “V” bottom — “V” for vaccine. Sentiment is the real problem for stocks and it’s horrendous, so people need a reason to flip. If we can learn of a tangible schedule for a vaccine arrival then we can look at this threat from a different perspective.
Until then, the smart investors search for great stocks that have been beaten down to levels that warrant attention. And that classification certainly applies to MMM stock.
Why MMM Stock Is a Buy On the Dip
The industrial sector was riding high until February when it fell off a cliff. This correction has so far exceeded the 2018 Christmas crash and much faster this time. The Industrial Select Sector SPDR Fund (NYSEARCA:XLI) is down 36%, but MMM stock is down 50% already from its highs. These are scary statistics, but therein lies the opportunity. Once all the madness abates, 3M will still have a real business. The stock yields almost 4% in dividends, which is more than alternative investment vehicles. Part of this Wall Street tizzy stemmed from the collapse in U.S. bond yields. So the 4% that 3M pays is even more attractive than before and it will bring buyers.
If a stock is down, it doesn’t mean it’s necessarily cheap. Fundamentally, it still sells at an 18.8 price-to-earnings ratio and almost three times sales. So if the market-wide selling persists, this one could have more bad days ahead of it as well. Meanwhile, smart investors do not seek to find the perfect bottom. In this case, we have enough data to tell us that near $130 per share, the stock has entered a support zone with emphasis on the term zone. When the VIX is this high, there are no hard lines in the sand. It’s hard to count on one line to act as support because daily price ranges are too wide.
Caution Is Warranted for Technical and Economic Reasons
MMM stock has defended the $125 area hard since 2013. Furthermore, it has now been cut in half from its all-time high of 2018. Nevertheless, since there’s still so much uncertainty, investors must be humble with their assumptions. I am fairly confident of my opinion, but I have to leave room for the possibility that markets might disagree with me for a little bit longer. So taking full size positions at once is reckless.
In addition, there is a technical threat. Once 3M lost $158 for share, it triggered a bearish pattern that targets the $100 mark. Whether it fills the entire potential lower or not depends on sentiment on The Street. These are unprecedented times and only once before has 3M’s relative strength index (RSI) been this low. All the signs point toward the fact that we are near bottom. Keep in mind that we remain in headline mode and everyday politicians around the world are shutting down businesses in panic. So it is inevitable that companies will have to revise their forecasts.
Stocks will fall on those headlines.
This madness has to stop, but we need more data on the virus before people can relax a little. To that end, the best sample comes from South Korea because they have done the most testing. I contend that all other ratios are wrong because they use wild estimates. It is impossible to state a ratio without an accurate denominator. Eventually cooler heads will prevail, but unfortunately we’ve already caused tremendous financial damage on a global scale. We will likely get negative GDP reports soon, so may have already self inflicted a recession.
Stocks like 3M are crashing from no fault of their actual fundamentals or executions on plan. They are caught in this panic storm over a virus that has yet to prove itself as deadly as feared. Unfortunately, only time will tell if this reaction is warranted or not. Until then, stay healthy and be patient and take small bites.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.