"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly has its attractions, but you've got to make sure you catch the haft -- not the blade. That's where Motley Fool CAPScomes in.
It's been a while, but thanks to last week's sell-off, we once again have a chance to stand beneath Mr. Market's silverware drawer in hopes of snagging a bargain. Let's meet today's contenders:
(out of 5)
3M (NYS: MMM)
Banco Santander (NYS: STD)
ING Groep (NYS: ING)
Whirlpool (NYS: WHR)
Hewlett-Packard (NYS: HPQ)
Last week wasn't a great one for stocks, as more than 5,000 of Wall Street's best and brightest saw their market caps decline. Hewlett-Packard shares continued to sag on weak forecasts for global PC demand, then saw a steep sell-off Friday when analysts poured cold water on the theory that Mark Hurd might return with his new company to save HP shareholders from their misery. You can blame analysts, too, for the declines at Whirlpool. (Goldman Sachs downgraded the shares Wednesday.)
In contrast, it's probably politicians who are to blame for the sell-offs at ING Groep and Banco Santander. As Europe's political class continues to fumble for a solution to the Continent's sovereign debt problems, nervous investors are selling Euro-banking shares in droves. With both stocks still rated four stars by CAPS members, it seems Euro-skepticism isn't universal, of course. Yet there's one stock on today's list that rates even higher and -- wonder of wonders -- didn't have any bad news at all to report last week ...
The bull case for 3M
CAPS member war2 calls 3M "a great company with outlook to the future, and a "leader and inventor."
Crazysmurf81 likes the stock's "low price to fcf" and dismisses 3M's sell-off as "people ... selling some stocks as though we are suddenly going to stop needing things such as energy, health care, consumer goods..."
Whatever the economy does, though, PJR02 thinks 3M will do fine as a "long term dividend play- not expecting any outrageous growth beyond the S&P 500 ... but long term should be a positive call."
And I can't disagree. 3M may not pay the kind of beaucoup dividends you find at fellow industrialists Dow Chemical (NYS: DOW) or DuPont (NYS: DD) . But its 2.8% dividend yield is still quite respectable, and with an expected long-term growth rate of 13%, 3M is growing faster than either of these peers.
On its own merits, I see 3M shares selling for 14 times free cash flow and 13 times earnings. Either valuation suggests fair value at 13% growth -- but to my Foolish eye, the dividend yield is enough to kick 3M over into "bargain" territory. Finally, 3M carries only a modest debt load, and one so small that its robust and growing free cash flow could extinguish in a matter of months should management choose to do so.
On balance, 3M looks like a fine investment today. It's not deeply discounted, I'll grant you. But as Warren Buffett has teaches us, all you really need to do to beat the market is buy "great companies" at "good prices." I believe Mr. Market is offering us just such a good price on 3M today. I believe it could bounce.
Disagree? Feel free. Click over to Motley Fool CAPS now and tell us why.
At the time thisarticle was published Motley Fool newsletter services have recommended buying shares of 3M. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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