There’s an old saying that “somewhere in the middle lies the truth.” That’s part of the story behind 3M (NYSE:MMM) being a stock to own even during these uncertain times.
Lately, the stock markets have been on a tear. In fact, the April rallies set records not seen since 1987, 1974 and 2000 for the Dow Jones and the S&P 500 and the Nasdaq Composite, respectively. The small caps coming into Thursday had rallied six days in a row for at least 1% each day.
To its credit, MMM stock is also 34% higher than it was just 28 days ago. Stocks have roared back to about halfway of the coronavirus crash. And as the saying goes, somewhere in the middle is truth, so it’s not as crazy as it seems.
I am not suggesting that it’s all up hill from here on the contrary I expect a fade. Stock charts are full of valleys and crests. There is a natural price pattern that unfolds in almost all charts I’ve ever studied. When long extensions like the recent crash happen, on the way back the price usually stalls around midway. That’s why technicians quote the Fibonacci ratios to point that out.
But, jargon aside, you can easily see that using no tools and just an eyeball. Resistance there is natural, so by definition, I anticipate a swoon. This helps establish a better base for the bulls going forward.
MMM Stock Has Support Below and Opportunity Above
I would own MMM shares here, even though I know they could drop a bit soon.
I know this won’t be the perfect place to start, but over the long term, it’s not that important. The stock should have strong support around $145 per share and more of it into $136. Conversely, a breakout from $160 would then trigger a big rally to challenge the January highs. Meanwhile, I am somewhat concerned with investor exuberance in April posing a threat to MMM stock.
But my bigger concern is 3M being stuck in the horrendous descending channel it has been in since the 2018 highs. So I would patiently wait for that to happen.
Towards the middle of March I wrote about buying the novel coronavirus dip in 3M. It rallied more than 20% after that, so it’s fair to say that the trade played out well.
But what about now?
Nothing has really changed since my last write up. The hoopla over the masks and ventilators has abated a bit. Yet demand for such personal protective equipment (PPE) is still growing, despite the squabble no longer making news. So the company can go about its business. In fact management reported earnings this week and the results were solid despite of the headwinds. 3M management has earned the benefit of the doubt on Wall Street.
Get Paid to Go Long 3M
So you’re thinking of buying the shares here, but wish MMM stock was a little lower so you would have more conviction? Or, at some point recently you thought you missed the MMM rally from the perfect bottom?
Options trades create income from the possibility of buying the shares lower. Instead of buying the shares now and risking $152, you can sell the MMM October $110 put and collect $3 per contract today. If the price stays above $110, then you can keep the premiums as pure profit without any out-of-pocket expense.
Otherwise, you own the shares and your breakeven price is $107 per share. In essence, with this play, you’re long with a 30% buffer from the current level and you don’t even need a rally to retain your gains.
Ultimately, this solid 118 year-old American company has an impeccable record, a strong balance sheet and a very healthy and diversified income stream. This makes it the poster child of what businesses are likely to survive this virus crisis and thrive thereafter.
Although there are no sure things on Wall Street, this is as good as it gets. It’s hard to imagine a scenario where MMM stock fails and the rest of the market is healthy.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here.