Sivy on Stocks: Winning a loser's game ,
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April 23, 2001

Winning a loser's game

Companies that make the fewest mistakes will fare best in the current
market. And 3M is trying to not miss a trick.

By Michael Sivy

Some sports, such as football, are winner's games. The team with the most
successful offense wins. Others, such as golf, are loser's games. Players
don't defeat their opponents -- victory goes to the person who makes the
fewest mistakes. What kind of game is the stock market? That depends on
what type of market you're in.

Bull markets are basically winner's games. If you take as much risk as you
can stomach, chances are you'll be rewarded. The broad upward sweep of
share prices will make up for any minor errors in timing or stock
selection. But when you're in the midst of a bear market, realize that
you're playing a loser's game. Anything that goes wrong -- a slight
shortfall in earnings, for example -- will have a disproportionately
negative impact.

Right now, investment success hinges on not losing, and the smartest
strategy is to favor companies with a high degree of consistency and
predictability. Such companies typically have strong finances,
well-diversified product lines, a balance between domestic and
international sales and a long history of dividend increases. One stock
that fits that description is Minnesota Mining & Manufacturing, or 3M
[MMM], which recently raised its dividend for the 43rd consecutive year.

At first glance, the results 3M reported on Monday look pretty good for a
near-recession economy. Earnings were up 3 cents a share on a 2.3 percent
gain in revenues. Analysts were cautionary, however, because the company's
U.S. revenues were down -- all the gains came from international sales,
which account for half the company's business. I don't have a problem with
that. Domestic sales are off because we're in the middle of an economic
slump. I see the fact that foreign business is supporting the company's
growth as a sign that 3M is well-diversified. The bigger issue, though, is
how the company will fare when the U.S. economy rebounds.

I recommended 3M last July at $88.50 a share as a stalled growth stock that
would get a higher valuation once growth picked up again. Since then, the
share price has risen more than 30 percent to $116.50. And I see further
gains ahead, as domestic sales improve over the next few quarters. For more
than a year, the company has been fine-tuning its product mix, which
includes more than 50,000 items ranging from electronics, medical devices,
and automotive parts to Scotch Tape and Post-it Notes.

That restructuring seems to be accelerating under new CEO W. James
McNerney, 51, formerly the CEO of GE's Aircraft Engine subsidiary. Analysts
applaud the speed with which McNerney has developed a comprehensive
cost-cutting plan since taking over on January 1. Along with first-quarter
earnings, 3M announced it would be shedding 5,000 jobs worldwide, or 7
percent of its workforce. In addition, 3M is planning to up its research
and development spending. The goal: deriving at least 20 percent of 2005
sales from products that don't even exist yet.

This year, earnings gains will likely be held to 5 percent or so, which
makes the stock look fully valued with a P/E of 24. But with a leaner cost
structure and an improving product pipeline, revenue and earnings growth
could accelerate starting in 2002. And that's the kind of outlook that
makes for winners, not losers.

###

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