Deep In The Money Calls With Jon Najarian
Betting on an Industrial Juggernaut
Our stock pick for today is industrial juggernaut 3M (MMM:NYSE), which has been churning out some terrific numbers in this recovery.3M crushed analysts' forecasts the last time it reported results Oct. 22, which drove the shares to a 17-month high above $78. Since then, the stock has looked attractive after pulling back to below $76.
This company is enjoying the benefits of excellent financial management and a good mix of products that will do well in this economy. In the prior quarter, sales came in ahead of expectations in its two most important segments: industrial and transportation, and health care. Some might initially worry about the company's exposure to transportation given the current weakness in consumer spending and the artificial stimulus from the "Cash for Clunkers" plan. But we think the company occupies an important place in the supply chain, where it will still benefit from general restocking in the industry. Management at 3M has already taken steps to restructure costs in this business, which lifted profitability in the segment in the prior quarter -- despite an 8.6% drop in sales. The company doesn't require perfect business conditions to deliver strong results in this space.
Health care was the most noteworthy segment for 3M, which posted a 4.4% sales gain (excluding currency) and was driven by areas such as skin care and wound care. We also like the fact that 3M appears to be building new customer bases in emerging Latin America and Asian Pacific markets.
A smaller segment in which business is simply going gangbusters is display and graphics, which is benefiting from flat-panel televisions and government stimulus-fueled demand for road signs. We expect to see continued growth and profitability in these areas as well.
Overall, 3M's operating margin was 24% of revenue in the most recent quarter, a full percentage point higher than a year earlier. Success at cutting costs and strong sales in key markets allowed the company to raise guidance for the rest of the year. Given how well the company is positioned, we think that could become a regular event at 3M. In our opinion, the market will increasingly price in outstanding results from this company and keep pushing it higher.
What we also like about 3M is that it's less volatile and would be less vulnerable to downside than many other stocks if the market corrects lower.
We'd look to buy the January $70 calls (MMMAN) for $6.20 or less over the next three sessions. Once you own them, program a sell order for $1 above your entry price.
In other news, given today's weak employment report it looks as if the broader market is headed lower. We'd suggest programming tight stop-losses on prior positions, including the Goldman Sachs (GS:NYSE) December $165 calls (GPYLM), the Cisco (CSCO:Nasdaq) January $20 calls (CYQAD) and the Alcoa (AA:NYSE) January $9 calls (AAAK).
We also have our eye on the Biogen Idec (BIIB:Nasdaq) January $40 calls (IDKAH), which have sold off recently. We think they have bottomed and expect them to return to near the cost basis, so we wouldn't suggest unloading them yet.
Regards,
Pete Najarian
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DISCLOSURE: At the time of publication, Pete Najarian held a position in AA.
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11/20/09 - 09:35 AM ESTPete Najarian is the author of TheStreet.com Deep In The Money Calls (the "Product"). Mr. Najarian a professional investor, noted media analyst and speaker, and co-founder of optionMONSTER®.
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| Dow Jones | S&P 500 | NASDAQ | 10-Year Note | |
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| 10,471.58 | 1,108.86 | 2,175.81 | 32.75 |
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