Everyone pretty much is aware that the FED has taken a different stance to their interest rate trajectory for this year. Whereas they focused on hiking interest rates during 2023 to combat stubborn inflation, they are now proposing up to six rate cuts in 2024; what is this sudden shift all about?
Considering that the rate of inflation is plummeting quickly, approaching the 2.0% target. The manufacturing sector of the economy has been suffering in the past year, showing contractions on a monthly basis; a money shift needs to happen soon.
During this transition period, uncertainty reigns high, so investors will likely look for stocks that offer stability and yield from the start. For this reason, and others that will become clear in just a bit, names like 3M (NYSE: MMM) should be considered additions to your watchlist this coming year.
Odds in your favor
Before you get overly excited about the FED’s announcement, you need to understand that the whole market is aware of these pending decisions, and it is tough to make money in a situation where everyone is aware of what could happen. There is rarely any money in consensus.
In a way, you should prepare yourself in case the FED delays these rate cuts or something brewing in the underground economy that is concerning enough to make the FED consider cuts. Either way, you can protect your portfolio by following the ‘smart money.’
One way to achieve this is to take into account what analysts at The Goldman Sachs Group (NYSE: GS) see within their 2024 macro outlook reports. One of the headlines in the report includes their thesis that the manufacturing sector is to see a breakout from its year-long contraction.
Considering that 3M is part of the manufacturing space exposed to this expected breakout, aligning your portfolio with a potential purchase in this stock can place the odds in your favor; more than that, this stock offers a sweet deal today in its dividend yield and discount to peers.
Comparing this stock to a peer group of other conglomerates and industrials can help you gauge the opportunity with this name. Pinning it against other stocks like Honeywell International (NASDAQ: HON) and even the broader Industrial Select Sector SPDR Fund (NYSEARCA: XLI) to look for discounts.
Selective process
Relative to the broader S&P 500 index, the industrial ETF has delivered an underperformance of up to 9.0% during the past twelve months; why? Well, industrial stocks are typically boring and don’t offer much growth, and 2023 was a year where money was after high-growth names like those found in technology.
Now that the FED is sponsoring a potential tailwind in this space, there is a brand new reason for you to believe that the industrial space could now catch up to the broader markets, of course taking 3M right along with it.
But, is it the best name in the space for you? Consider the following facts before you answer that question:
Considering that the average forward price-to-earnings ratio for the peer group sits at 15.9x, 3M proposes a 31.4% discount to the overall group in its 10.9x valuation. This makes it especially attractive in the large capitalization section of the industry.
Specifically to Honeywell, 3M is valued 46.0% below its competitor’s 20.1x multiple, despite analysts projecting almost the same rate of earnings per share growth in the coming twelve months. For 3M, an 8.7% projection comes close to Honeywell’s 8.8% projection. Mispricing opportunity?
More than that, Honeywell’s dividend yield stands only at 2.2% while 3M’s is nearly 5.6% today; is it easier to decide now? There is another worthy adversary that should be mentioned here, and that is DOW (NYSE: DOW).
The market is valuing DOW stock at a 15.9x forward P/E multiple, throwing 3M into a discount once again, this time a 31.4% one. This competitor does offer a more competitive dividend yield of 5.3%, so again, why the major mispricing with 3M stock?
It would seem that the only analysts willing to stick their necks out on this opportunity are the ones at Wells Fargo (NYSE: WFC), as they place a $112.0 a share price target on the stock, above the targets from all other Wall Street analysts.
While 3M stock may not be attractive or popular in today’s market, you can rest assured that it could potentially attract investment dollars if the FED changes its timetable regarding cuts, sending investors to seek the safety of 3M’s brand and its bond-beating dividend yield.
