3M Remains Target of Sellers on Overstretched Valuations

3M Remains Target of Sellers on Overstretched Valuations
November 29, 2016

The shares of diversified multinational packaging product manufacturer 3M Company (NYSE: MMM) have risen nearly 6% in the recent weeks. One of the main reasons for the uptrend is the third-quarter earnings of $2.15 per share that beat the Wall Street analysts by a penny. However, considering the headwinds faced by the company, we believe that the stock would again start declining in the current week. We hereby present the arguments for the bearish view on the company.

3M received nearly two-thirds of its revenue from outside the US. Thus, a strong dollar would certainly hurt the company. The slowdown in China is also expected to affect the top line and the bottom line of the company. The company had warned that its full year 2016 revenue would be more or less flat compared to the prior year. 3M had also slashed its fiscal 2016 earnings view to a range of $8.15 to $8.20 per share, from $8.15 to $8.30 per share issued earlier.

In the recent past, several research firms have turned bearish on 3M. In a note issued on November 21st, Goldman Sachs stated that they have changed their rating on 3M, from ‘neutral’ to ‘sell’, with a price target of $159. A week later, the Zacks analysts followed Goldman Sachs and lowered the rating from ‘hold’ to ‘sell’. The analysts at the Royal bank of Canada had given a ‘underperform’ rating to the stock, with a price target of between $155 and $159. Several investors would rethink before adding long positions as of now.

A week before, an unusually high volume of put contracts was traded in the US markets. As many as 944 put option contracts, expiring in January, have been purchased by a trader. The open interest has now crossed 26964 contracts. This indicates that a major player is heavily bearish on the counter. These kinds of trades are usually taken by traders who are clearly anticipating negative news relating to the company. At this juncture, considering the earnings cut and downgraded, along with the large bearish positions opened in the market, it would be better to hold a short position.

After failing to break the resistance at 176, the stock has begun to lose momentum. The stochastic oscillator indicates a short-term overbought scenario.

3M - Technical Analysis - 29th November 2016

So, a binary trader can invest in a low (or below) contract, which is an equivalent of a put option. The trader should enter the trade when the underlying price of the asset is near $173. A one week expiry period should be selected for the trade.


Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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