Investing Club: We don't need two stocks tied to Covid diagnostics, so we exited one of them

Published Mon, Mar 28 202211:55 AM EDTUpdated Mon, Mar 28 202212:49 PM EDT

We're exiting our entire position in Abbott Laboratories (ABT), selling 270 shares at roughly $119.19 each. Following Monday's trade, the Charitable Trust will no longer own shares of Abbott Laboratories. This sale decreases ABT's weight in the portfolio to zero from about 0.87%. We'll lock in an average gain of about 15% on Abbott Laboratories shares purchased between February 2020 and August 2021. However, those last remaining lots don't tell our full story. Long-term followers of Jim Cramer's Charitable Trust know we first started a position in ABT in June 2017, when the stock traded below $50 per share. Abbott Laboratories turned out to be a great earnings compounder thanks to a couple of successful acquisition integrations; the strength of its medical device business, largely from the FreeStyle Libre; and Covid supercharging growth in diagnostics. While Abbott's BinaxNow home Covid test has been a boon for growth for almost two years now, it's also made the stock frustratingly trade on pandemic-related dynamics. It's at this point that we should point out that shares of Abbott Laboratories often trade in tandem with Danaher (DHR) because both companies have big Covid testing businesses. We can make the case that having two companies with this kind of exposure is one too many because some epidemiologists see Covid as transitioning from a pandemic to becoming endemic, meaning a disease that remains a risk as part of daily life but isn't raging. Between Danaher and Abbott, we believe DHR is the better stock to own right now for three reasons. First, Danaher's biopharma business is the faster grower compared to Abbott's medical device business: 17% core organic growth in the fourth-quarter of 2021 versus 15.9%. We're comparing the two businesses because they're the heart and soul of each company and are indifferent to testing dynamics. Second, we believe Danaher management is superior at identifying attractive M & A opportunities. Third, we'd rather be with Danaher because its earnings are expected to grow this year and next year. For Abbott, however, we're not as confident that 2022 and 2023 earnings will surpass 2021. This is the setup we currently see with FactSet consensus estimates. The lack of clear earnings growth has been a dilemma for investors and could prove to be a longer-term headwind to the stock than what we previously thought. Lastly, this sale will raise some extra cash and free up room in the portfolio for a potential new name. We don't like to add on a new position without taking something off first because we're big believers that every portfolio manager must cap the number of stocks they own at any given time. If you constantly add new stocks to a portfolio without ever taking anything off, you run the risk of cutting short the day-to-day homework that's necessary to stay on top of your portfolio. If we want to buy something new — and we are always on the hunt for new ideas in our bullpen — we're going to part with something in the portfolio that has a less attractive risk reward. (Jim Cramer's Charitable Trust is long ABT and DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Abbott Chairman of the Board and CEO Robert B. Ford delivers a keynote address at CES 2022 at The Venetian Las Vegas on January 6, 2022 in Las Vegas, Nevada.

Ethan Miller | Getty Images

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