Tape Off Bad Wall Street Advice

Dow Jones industrial average member 3M hit an all-time high north of $244 in late December 2018. At that time it was extremely expensive by all historical measures. Did Wall Street analysts put out reports recommending profit taking while the stock was red hot? Of course not. The graphic below is data from the Value Line report on MMM, which was published just days after MMM set that new record high. I added my own commentary to help you understand what Value Line was telling its subscribers to do with MMM. The stock's 10-year median multiple had been just 15-times. At the time of the report, it fetched 26.3-times trailing earnings per share. Do you like paying 75% more than list price when you buy something? That price-to-earnings should have been a screaming red flag. MMM's average yield had been 2.46%. At 2%, it was almost 19% below its own historical normal. That's not a good thing, either. Value Line was not ignorant of those facts. It indicated that 3M was expensive enough to have already almost reached its three- to five-year target price zone. There was little chance for decent returns over the long run, even if everything went well. What was their bottom-line advice for readers? MMM was buy-rated for year-ahead price performance based on strong momentum and a good balance sheet. Their analyst glossed over MMM's super expensive valuation by saying its risk-adjusted return made up for that. He even called the sub-par dividend a plus factor. Lastly, he indicated that MMM was likely to hold up better than most stocks in the event of a broad market downturn. A quick glance at the chart below will help you decide if the predictions were accurate. By definition the buy rating was horrible. The idea that 3M's sterling balance sheet would limit risk proved inaccurate as well. The good momentum that helped shape the year-ahead positive vibe only lasted for about another month. Shareholders who didn't exit near the top never got another chance at a graceful retreat. Patience was not only unrewarded, it got punished. All that damage could not be blamed on overall market conditions. It occurred as the S&P 500 and Dow Jones were on their ways to new records. Telling people to buy, or hold, a severely overpriced stock like MMM, back in January of 2018, clearly did not pass the smell test. It was stinky advice. What did the same Value Line analyst have to say about MMM in the brand new edition that came out this weekend, with 3M down to $174.51 at his press deadline? Note that the stock's price-to-earnings is now just barely above its current 10-year median level. That's much, much better than in January of 2018. Dividend increases combined with the lower share price have pushed MMM's yield to 3.35%. That's the highest yield on MMM since near the bottom of 2009's crash. Three-to-five year prospects look more promising than before, mainly due to the stock's more reasonable valuation. So, in light of all this good news, what is Value Line's new advice? OMG, shares that it loved at over $235 are now rated as SELL at $174.51. The balance sheet is still excellent, but now momentum is negative. Like so many chart-loving traders, Value Line doesn't want to recommend a stock that is cheap but hasn't started turning around yet. Stop listening to people who don't make sense. Buy what's undervalued. Then simply wait for it to get back to normal. Stocks regress toward the mean faster than most people think is possible. Barring major changes to a business's fortunes, it typically occurs within months rather than years.

Tape Off Bad Wall Street Advice

Study analysts' bad 3M advice for an example of what not to do as an investor when a company is at its highs.

Columnist Conversation

This Weekend on Real Money

Wednesday on Real Money Pro

Pretty Incredible + Hard to Believe

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.