Declining Uncertainty Is Good for Stock Prices

Investors don’t like uncertainty. That tends to lead prices lower, which can create a good buying opportunity. Ideally, the time to buy is when uncertainties that represent a major threat to a business start to go fade away.

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  • That may not mean an immediate move higher, but it will likely mean the end of a downtrend and an opportunity to beat the market over time. Among company-specific uncertainties, one of the most challenging to contend with is litigation.

    When a company is able to move past endless litigation, like 3M (MMM) just has with its $10.3 billion “forever chemical” settlement, investors have less uncertainty.

    The conglomerate has had its shares cut in half over the past 5 years, as the threat of endless lawsuits have weighed on the company. That’s taken shares to 10 times earnings in time for this settlement.

    Action to take: While the settlement ends some uncertainty, its size is about 20 percent of 3M’s market cap. That could mean impacted profitability for some time, although not enough to lead the company into bankruptcy.

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  • In the meantime, the valuation is still inexpensive. And shares have a dividend yield near 6 percent at current prices.

    For traders, a rebound is likely to play out over the next few months. The November $110 calls, last going for about $3.00, can potentially deliver mid-to-high double-digit gains.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.

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