The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

25 January 2007

One more opportunity, albeit not quite the same picture

The same reader who brought to our attention Avery Dennison/AVY offers a second opportunity, Minnesota Mining Manufacturing/MMM.

btw, MMM, as you well know, doesn't fit the classic pattern you're illustrating, but it is a very big value stock, and the current base is three years old. The company sells at an 18% discount to the S&P; it has gross margins of 50% vs. S&P 36%; it's selling at just about 2.6 times sales; and it is one of the best companies in America. As it works through various issues that the street is overly focused on, I believe it will, at the least, return to an S&P multiple. Quite simply, IMO, it's a great opportunity for LT investors to buy a world class company at a significant discount to fair value. So all this made me curious what there was on MMM at Seeking Alpha. Lo and behold, my old buddy Leon Cooperman offers a very good analysis of MMM. Pretty much bears out my thinking, but with a lot more detail. Guess that's why he makes the big bucks!

Excellent descriptions, both yours and Leon's. Thank you! Minnesota Mining & Manufacturing/MMM (hereonin, simply MMM) is a wonderful company, and a great opportunity. The truth is that the picture is not the same, nor even similar, as you note. ("...doesn't fit the classic pattern you're illustrating...") My objective in highlighting the particular pattern I do, is to have readers and investors see that price declines are merely part of the continuum, and thus not to be feared. And that at some point in the ambiguous future, the shares will again break out (up). Those 13 charts, plus AVY, DD, STI (and others I neglect to include) are very near the end of their lengthy (time) but shallow (price) corrections. Because all true patterns remain true in all periodicities, these specific opportunities particularly excite my investment interest. Keep in mind that these oscillations - up and down - create the opportunities for us, the investors.

The 2 1/2 year base to date for MMM appears more a consolidation in a continuing up trend than a massive, long term base...

[click on chart to enlarge]

The line of declining tops (#2) is crucial for the bullish case; at some point in the future, the shares will break out convincingly above trend line #2, and subsequently recapture the up trend. Trend line #1 represents the primary up trend; investors could accumulate on tags or near approaches of that line. The two lines do not converge until March of 2013, so two possibilities could occur:
1) The pattern continues to build as an intermediate term base in a long term up trend, and breaks out sooner rather than later;
2) The pattern instead builds as a long term base in a massive (even) longer term up trend with a breakout scheduled for sometime between now and mid-2010.

Please do not view the #2 possibility as a 'prediction' -- it merely would fulfill the 75% Rule of most area patterns. I prefer possibility #2, as it would afford me the opportunity to purchase at an increasingly inexpensive price and a cheaper (better) value. This would occur because the company would continue to do what it does so well -- innovate and make money. And the stock would then endure a lengthy time correction. Recall that the bigger the base, the bigger the ultimate price move.

btw (meaning, off the topic of this post), I drew trend line #4 to delineate two items:
1) The accelerated advance into the all time high during May 2004 from the prior intermediate term base; and
2) Point #3, which in technical analysis parlance is known as rocking the cradle.

In this instance, Point #3 represents the optimal moment to sell -- or, at minimum, hedge. Chart action now offers the certainty of a breakdown beneath a crucial trend line (#4), the retracement that proves what once was support is now resistance. Similar setups occur from the opposite perspective, and represent optimal moments to purchase, as you might suspect. When you find them, close your eyes, hold your stomach... And buy.
-- David M Gordon / The Deipnosophist


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