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Conglomerate Industry Stock Trades Are Wrong

2 April 2008 - Markets - Editor

Recession makes life difficult for a stock investor. You may think that bulls suffer more pain. Factually, bears may make greater stock losses. Any uncontrollable impulse to trade can hurt. Commissions for stock brokers are the only certain cash flows. A long term optic is a reliable antidote for meandering stock transactions.

Stocks of Conglomerates quiver during bear phases of the stock market. The wise investor will hang on to them, no matter what. You might speculate with them. The profit potential of trading in a stock on a margin is subject to risks. Stock prices may not fall as you expect. You could make a net loss in the long run. Stock investment is fundamentally different from trading in any case. Stocks of Conglomerates are better as sound investments than as cards on a pool table.

Technology, human resources, physical infrastructure, financial strength, and durable branding, are five top assets of Conglomerates. You cannot enter this club without them. None of these business treasures are adequately represented on financial statements. Some, such as brand values, are not mentioned at all.

Let us consider a specific example. The nominal market capitalization in March 2008 of the 3M Company (NYSE: MMM) is about $55 billion. The stock has crept close to its 52-week low towards the end of this month. Even so, the mean of stock analysts’ recommendations conclude that the stock is overweight.

MMM is a global player. It is present in an astonishing array of economic and industrial segments. The company has made 16 acquisitions in 2007 alone. The Price to Earnings Ratio has been below 14 over the last four quarters. The Payout Ratio has been 33.50 during this period.

Would you sell this stock?

 


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