Source: PaxForex Premium Analytics Portal, Fundamental Insight
Shares of industrial conglomerate 3M ended July on impressive notes but failed to maintain momentum. They were down 13.2% in August, according to S&P Global Market Intelligence.
In July, 3M made a huge announcement that helped its stock soar, but a protracted lawsuit that could cost the company billions of dollars caused investors to panic and caused the stock to plunge to multi-year lows.
3M faces huge legal risks, including lawsuits by veterans over defective earplugs that caused hearing problems. Although these lawsuits were expected to hurt 3M, investors only got a glimpse of the extent of the potential damage last month. It threw them into shock.
A litigation consultant hired by the lawyers who sued the conglomerate over defective earplugs said 3M would face "more than $100 billion in damages and bankruptcy" if all of these lawsuits, numbering more than 230,000, were pursued, according to a Bloomberg report.
Yes, the consultant believes that 3M could go bankrupt in the coming years. Also, by comparison, 3M's market capitalization at the time of this report was about $66 billion.
The veterans' attorney is unhappy that 3M has filed for bankruptcy of Aearo Technologies, which 3M acquired in 2008 and which made earplugs. Although 3M also set up a $1 billion trust fund to settle the lawsuits, attorneys argue that the amount falls short of the potential settlement and that Aearo's bankruptcy would relieve 3M of further liabilities.
The bankruptcy court has already rejected 3M's controversial attempt to stop the lawsuits as part of its bankruptcy plan, and a new federal lawsuit is now even trying to block 3M's dividend and its move to spin off its health care business.
3M stock is hugely popular with income investors, given its incredible track record of 64 consecutive years of dividend increases. In the past three years alone, 3M has returned more than $14 billion to shareholders in dividends and stock buybacks.
In July, 3M unexpectedly announced plans to separate its healthcare operations into a separate company by the end of 2023 to capitalize on a business that has been quite weak in recent years. While investors in 3M cheered the announcement, they soon realized that the company's legal risks could no longer be ignored.
As 3M stock has fallen lower and lower for several years now, investors are losing patience with the Dividend King. 3M's litigation, which has become widespread and nasty, is likely to continue to hurt the stock as investors fear the legal costs.
As long as the price is below 125.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 119.42
- Take Profit 1: 115.00
- Take Profit 2: 110.00
Alternative scenario:
If the level of 125.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 125.00
- Take Profit 1: 132.00
- Take Profit 2: 139.00
