Monday, February 23, 2015

MMM: Bull play, longer-term rules

The wide-ranging technology giant 3M Co. (MMM), headquartered in Maplewood, Minnesota, broke above its 20-day price channel on Friday and continued trading higher on Monday, confirming the bull signal.

3M is on my list of innovative companies because it was mentioned in the book Firms of Endearment (2nd edition), by Rajendra Sisodia,  Jagdish Sheth and David Wolfe, published in 2014.

I consider stocks on my innovators list for positions managed under my longer-term rules: Structured as long shares with a minimum one-year holding period.

[MMM in Wikipedia]



MMM has been in an uptrend since the 2009 Great Recession low. Elliott wave analysis places the rise in its 3rd wave, typically the most energetic of a five-wave trend. The 3rd wave began in October 2011 from $68.63.

The internal wave count of the 3rd wave lacks clarity. I've framed it as, from the shorter term to the longer term, the 3rd wave in the 3rd wave in the 5th wave of the 3rd wave.

Other framings are possible, but there are these inescapable facts: This is a maturing trend, but one that will attain higher levels before the inevitable scary plunge of a major correction.

The next correction will take back a portion of the rise from $157.74, attained Jan. 6, and then continue to still higher highs.

However, there may be more sideways movement before the next leg of the uptrend begins. The Jan. 6 low might in fact not be the end of wave 2 (marked by a yellow oval).

If the price continues in the next few days to move above today's high (so far) of $168.64, then my count on the chart will be confirmed. If not, then wave 2 is not complete.

Click on chart to enlarge.
MMM 4 years 2-day bars (left), 90 days 4-hour bars (right)


Implied volatility stands at 16%, in the 5th percentile of the most recent rise. I've calculated the ranges for a year, since I'm considering MMM as a trade under my longer-term rules.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

Odds and Yields

MMM has completed eight breakouts since April 4, 2011, the day wave 3 {+3} to the upside began. Half were successful, on average yielding 3.6% over 55 days. The unsuccessful trades lost 2.8% over 12 days, on average.

The Company

Analysts are pessimistic about MMM's prospects, coming down collectively at a negative 14% enthusiasm rating. Zacks Investment Research gives MMM a neutral rating.

The company reports a return on equity of 30%, with debt running at 51% of equity.

Earnings have been profitable in all of the past 12 quarters, 10 of which have produced upside surprises. The most recent of the downside surprise was for the 1st quarter of 2014

The earnings yield is 4.44%, compared to a 2.07% yield on 10-year U.S. Treasury notes. The dividend yield is 2.43% annualized at today’s prices.

The "fair" price implied by earnings growth estimates is $98.86 per share, compared to the market price of $168.47 per share. The market premium is 70% above the implied price.

The stock is selling at 23 times earnings and also at a premium to sales. It takes $3.35 in shares to control a dollar in sales.

Institutions own 66% of shares.

MMM next publishes earnings on April 23. The stock goes ex-dividend in May for a quarterly payout of $1.025 per share.


MMM on average trades 1.8 million shares a day.

The Trade

For a trade of this sort -- an innovator that lacks greater than even odds of a profitable bull signal -- I structure my positions as long shares.

Decision for My Account

I don't intend to open a position in MMM because, at this point, I've committed all of that assets that I've set aside for my longer-term strategy.

However, if I had the resources I would still be reluctant to take the trade. MMM is in the 5th and final wave of its rise from 2011. The end of that rise will usher in a major correction that could well bring MMM's price back to the double digits if it is a directional downtrend. If it is sideways, the price damage may not be as great, but it will still mean a long period of stagnation.

There is under the Elliott rules no way to say how high the 5th wave could travel. Often, however, they turn out to be truncated, the weak runts of the nest lacking the energy to spread their wings and fly.

Also, the high market price of MMM compared to the price implied by earnings growth estimates and the dividend suggests that this stock is a very expensive risk to take.

-- Tim Bovee, Portland, Oregon, Feb. 23, 2015


My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

The directional score is calculated as the sum of the following:
  • Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
  • Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
  • Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
  • Ethusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
  • 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
  • One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


Two social media feeds provide notification whenever something new is posted.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at

No comments:

Post a Comment