Analysts' Advice Just Doesn't Stick for This Company

Few things are harder to understand than the reasons for analysts' recommendations. Action in the shares of blue-chip and Dow Jones member 3M make for a good illustration. In September 2011, the overall market was distressed over the European banking crisis and the Greek bail-out proceedings. MMM had dropped from north of $98 to south of $69. It's trailing price-to-earnings, or P/E, was a very low 11.2-times. 3M's current yield was 3.12%. Unsurprisingly, MMM put in a sustainable rally. By early 2015 it had reached more than $170. That rise took the stock to 22.5-times forward earnings per share, or EPS, well above its previous valuations. Eight months later, MMM was back down to $134 and ready to rumble once again. Fast forward to January of 2018. 3M rose all the way to almost $260. At that price it fetched 28.5-times projected year-ahead EPS. It yielded a historically meager 1.92%. The multiple was then 55.7% above normal. MMM's dividend yield was about 22% below its typical level. MMM's momentum was off the charts. The stock had outpaced the broad market by more than 100% over both the prior year, and half-decade. Value conscious investors should have known that a regression-to-the-mean valuation could take MMM back down to $180, even if all went well. Did a potential 30.6% pullback get analysts to temper their enthusiasm? Far from it. Value Line labeled MMM a buy, even as they noted its three to five year prospects were poor. Instead of warning people to get out, or lighten up, Value Line and most other services continued to recommend purchase of MMM at its worse valuation in many years. Traders who followed the advice suffered badly. As of Oct. 9, MMM was down to $150.60, down 42% over 21-months. At its new price, MMM sold for just 15.9-times this year's EPS and around 15.1-times next year's estimate. It yielded 3.82%, more than 55% above its average yield since the start of 2011. A regression-to-the-mean valuation supported an end of Dec. 2020 target price of $187. The pullback had left MMM's momentum looking bad. Relative performance had suffered, too. 3M's total returns are now well behind the market over the 1-year, 3-year and half-decade look-back periods. Did Value Line notice MMM's now-bargain valuation and recommend the stock? Nope. In the brand new edition of Value Line, dated Oct. 11, but published online on Oct. 3, 3M carried a sell rating. Value Line recently added a new feature. It now provides 18-month mid-point target prices for each stock covered. Its 18-month goal for MMM? $200, almost 33% plus dividends above its Oct. 9 closing quote. How can MMM be a sell if you expect to net almost 35% in total return over the next 18-months? Note, too, that 3M now offers much better long-term potential than it did when Value Line, and others, loved it near $260 back in January of 2018. This is just one example of the crazy ways of Wall Street. See my recent Real Money Pro article on FedEx for another similar example of a stock that was highly regarded when clearly overpriced and shunned currently when it is cheap and offering huge upside. 3M hasn't been priced this cheaply since the middle of 2013. It's never offered a more generous yield. Ignore the pundits. If you longed to own MMM when it was moving up sharply, it might now be time to start taking a position.

Analysts' Advice Just Doesn't Stick for This Company

Unless you like to buy high and sell low, taking some analysts' word on 3M has made no sense.

Columnist Conversation

Pretty Incredible + Hard to Believe

This Weekend on Real Money

Bitcoin vs. Gold: Which Should You Invest In Now?

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.