Analysts tend to regard large market cap companies as good and stable long-term investments. Therefore, I personally do not make investment decisions on such solid stocks based on daily hype. However, even the darlings of Wall Street get held down from time to time. Today I’m going to discuss three stocks, 3M (NYSE:MMM), Johnson & Johnson (NYSE:JNJ) and Tesla (NASDAQ:TSLA), that may experience further volatility in September.
I believe there will likely be some profit-taking with these names in the coming weeks. Investors may consider waiting on the sidelines if they do not currently have any positions open in MMM, JNJ or TSLA stocks.
Alternatively, if they already own shares, investors may either consider taking some money off the table during this market bounce or hedging their positions. As for hedging strategies, covered calls or put spreads with Oct 18 expiry could be appropriate. Straight put purchases could be expensive due to heightened volatility. Any short-term decline in these shares may offer better entry points for long-term investors.
Stocks to Sell: 3M Company (MMM)
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3M, a coveted member of the Dow Jones Industrial Average, is clearly going through a difficult patch in its history.
In January 2018, MMM stock reached an all-time high of $259.77. Since then, it has been in a multi-month decline. Year-to-date, 3M stock price, which has missed the broader market rally of 2019, is down about 15%.
On July 25, MMM stock reported second-quarter earnings. During the quarter the group’s sales fell 2.6% year-over-year to $8.2 billion. Similarly 3M’s adjusted earnings per share fell 28% year-over-year to $2.20. Management highlighted 3M’s struggles with low demand in China’s automotive and electronics sectors.
Following the earnings report, despite the fall in profits, MMM stock initially went up. However, that move was rather short lived as on Aug. 28, 3M shares saw a 52-low week low of $154.
If there were further external events, such as increased trade tensions with China or a slowing down of the U.S. economy or company-specific problems, it is possible that management may also take the extraordinary measure of cutting MMM stock’s dividend.
At this point, the bulls are not yet in control and the selling pressure has increased, especially after the Q2 earnings report. Therefore MMM shares will need a catalyst to make them attractive in the eyes of long-term investors, who are probably still skeptical about the near-term prospects for the company.
I’d find MMM stock attractive if it falls below $130 — especially if it heads toward $110.
Johnson & Johnson (JNJ)
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With a market cap of $339 billion, Johnson & Johnson, the healthcare giant, is currently number 37 on the Fortune 500 list. The group builds its moat by investing heavily in its diverse pharmaceutical pipeline.
JNJ operates in three segments that provide it with diversified sources of revenue, earnings and cash flow:
- Pharmaceutical (contributes more than 50% of JNJ’s pre-tax profits)
- Medical Devices and Diagnostics
JNJ’s diversification enables the company to withstand economic cycles more effectively. Geographically, the U.S. provides almost half of the revenue.
However, the Johnson & Johnson brand has recently been hit by a landmark Oklahoma court ruling. According to the ruling, the drug giant has responsibility for helping fuel the state’s opioid epidemic by aggressively marketing painkillers. JNJ has been ordered to pay $572 million in damages.
Although the actual amount of this fine may not necessarily dent JNJ stock’s fundamental metrics much, I tend to take lawsuits and rulings of this kind rather seriously. In other words, there is usually more headache to follow.
Year-to-date, JNJ stock is flat. I’d consider buying JNJ stock if it falls below $120 and especially if it heads toward $100.
Investors who buy Johnson & Johnson stock now will enjoy a dividend yield of almost 3%. The conglomerate has raised its dividend each year for over half a century. With its diverse range of products, I think JNJ is likely to continue to be a high-dividend staple stock.
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When Tesla released worse-than-expected second-quarter 2019 earnings on July 24, many investors possibly ended up with more questions than answers on what to expect from Tesla stock for the rest of the year.
Before reporting earnings, TSLA stock closed at $264.88. The next morning it opened at $233.50. Now Tesla stock price is hovering around the $220 range.
The past year has seen the demand for electric vehicles decline in the U.S. And Tesla’s Model 3 sales have not been at the levels expected. Tesla’s Q2 results showed that the gross margin of its automotive segment is declining. Last quarter, it was 20.2%. In Q4 and Q3 of 2018, the metric was 24.3% and 25.8%, respectively.
As we discuss Tesla’s problems, we have to mention that the auto sector is susceptible to the trade-war risk. As the demand in the U.S. declines, Tesla needs to achieve increased sales numbers from overseas, namely from China, which has the largest electric vehicle market in the world.
In late 2017, Tesla and the Chinese government agreed that the company would manufacture cars in China, and build and own a factory in Shanghai.
TSLA is continuing to build its manufacturing plant in Shanghai. However, the details as to when actual production will begin at the plant are sketchy. Tesla is yet to release definite dates and production goals for the plant.
Therefore, before committing any capital into the shares, I’d like to see the next earnings statement, expected in late October. By then, we might even have an earnings warning statement, which would send the stock even further south.
At this point, Tesla bears have the upper hand and I’d consider investing in TSLA stock as a speculative bet.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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