Why Contrarian Bulls Should Consider 3M Stock

MMM shares have surged higher over past year to trade at record highs, but Wall Street has become increasingly bearish

Apr 24, 2017 at 11:05 AM
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Dow component 3M Co (NYSE:MMM) is scheduled to report earnings tomorrow morning, and the stock could be a prime target for contrarian bulls. For instance, Schaeffer's Senior Quantitative Analyst Rocky White recently conducted a study that looked at stocks that have outperformed on the charts, yet have seen bearish sentiment increase. The criteria used for the study are as follows: 

  • Stock is higher year-over-year and has outperformed the S&P 500 Index (SPX)
  • Short interest has increased over the past year
  • Percentage of analyst "buy" recommendations has decreased over the past year
  • Stock has a Schaeffer's put/call open interest ratio (SOIR) above 1.00
  • Stock trades one million shares per day or trades weekly options
MMM stock was just one of 11 names we follow that met the above requirements. For starters, with their 1.2% gain today, the shares are now up 15% over the past year to trade at $193.73, and earlier hit a record high of $194.43. Still, just three analysts recommend buying MMM stock, versus seven "hold" ratings and two "strong sell" recommendations.

Plus, short sellers have continued to target the blue chip, despite its impressive technical performance. During the past two reporting periods, short interest on MMM increased by 13.2%. The roughly 8 million shares now controlled by these bears represents four times the stock's average daily pace of trading, hinting at a healthy amount of sideline cash that could come in and help 3M on the charts. 

The bearish sentiment is even more drastic in the options pits, as MMM has a SOIR of 2.40. Not only does this mean put open interest more than doubles call open interest among options expiring within the next three months, but the reading is an annual high, meaning short-term options traders are unusually put-skewed. Indeed, call traders have seemingly ignored 3M, with call open interest sitting just 1 percentage point from an annual low. 

The recent earnings history for 3M Co (NYSE:MMM) could be a reason some are reluctant to get behind it. The shares have moved lower in the session after earnings in three of the past four quarters. Going back eight quarters, MMM stock has averaged a 2.5% swing in the session subsequent to earnings. This time around, options traders are pricing in a 3.1% move for Tuesday's trading session, regardless of direction. 

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