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Be as stubborn as a bull: Invest in the stock market

6:19 PM, Mar. 9, 2013  |  Comments
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According to Barron's, portfolio managers are urging clients to become more risk-tolerant and subsequently more open to equity investing.

Remember that 40 years of statistical data confirms an average annual compounded total rate of return for equities of about 11 percent.

Yes, I am eminently familiar with the statement by famed economist John Maynard Keynes, "In the long run we are all dead." More pertinent is the phrase that every journey begins with a first step.

As Barron's so adroitly went on to write, the shift toward stocks will become more pronounced "when investors realize a secular bull market will be the story for the next three to five years."

While I try to only discuss companies where my analysis portends potential capital gains, not every idea is a winner. This was clearly illustrated by my ebullient forecasts versus the historical share price trend of 3M (MMM).

As a result, I resisted further analysis of 3M, relenting two years ago because as Barron's once pointed out, the world's population continually interacts with the company's products, from fiddling with Scotch tape, to leaving urgent messages on Post-its, to parking their posteriors on Scotchgarded furniture.

A year ago when I wrote about the company, my earnings estimate for 2012 was $6.30 per share with a 12-month price target on the shares of 96, for a potential capital gain of 13 percent. So how did 3M perform? Earnings came in at $6.32 and the shares recently closed at $104.66.

Delving into the company's 2012 performance, 3M posted record sales of $29.9 billion, up 1 percent year over year. Organically, sales grew 2.6 percent and acquisitions added another 0.8 percent. Adverse foreign currency translation reduced sales by 2.4 percent. Full-year 2012 earnings increased 6 percent with an operating margin of 21.7 percent and a return on invested capital of 20 percent.

3M reaffirmed its 2013 full-year performance expectations. Earnings per share are anticipated at $6.70 to $6.95, with organic sales growth of 2 to 5 percent. 3M also expects free cash flow conversion (free cash flow divided by net income) to be in the range of 90 to 100 percent.

The intrinsic value of the shares using a discounted earnings methodology is $125, while the more conservative free cash flow to the firm model yields an intrinsic value of $167.

My earnings estimate for 2012 is $6.86 per share with a 12-month price target on the shares of $118, yielding a potential 13 percent capital gain. There is also an indicated dividend of $2.54 per share for a yield of 2.4 percent.

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