We're buying more shares of two companies, stepping off the sidelines in this down market

Published Tue, Sep 20 20222:44 PM EDTUpdated Tue, Sep 20 20223:29 PM EDT

We're buying 25 shares of Danaher (DHR) at roughly $272.79 each. Following Tuesday's trade, Jim's Charitable Trust will own 510 shares of Danaher, increasing its weighting in the portfolio to 4.96% from 4.73%. We're also buying 100 shares of TJX Companies (TJX) at roughly $63.04 each. Following Tuesday's trade, the Trust will down 950 shares of TJX, increasing its weighting in the portfolio to 2.13% from 1.91%. After patiently waiting for the market to pull back over the past few days, we are nibbling on two stocks of quality companies that we think highly of in both the short and long term. We're adding to our position in Danaher and buying back 25 shares we previously sold at higher levels. Shares have pulled back about 6.5% since we sold 65 shares in late July and nearly 9% since we sold 35 shares in mid-August at what turned out to be the near-term high. We previously bought back 35 shares at around $270 on Aug. 31. In most cases, our investing discipline would say that we need to wait for DHR to break below our most recent buy before adding again. However, we are breaking our own rules. We have two reasons why DHR looks more attractive from a long-term investment perspective Tuesday than it did three weeks ago. First, we know the business is executing at a high level right now. The company announced last week that it expects third-quarter core revenue growth to be above management's guidance range thanks to $175 million in additional Cepheid respiratory testing revenue versus prior expectations. In a market that is worried about where the next negative earnings preannouncement will come from, we can safely take DHR off this list based on this update. Secondly, and perhaps more importantly, the company is separating the last cyclical part of the business, the Environmental & Applied Solutions (EAS) segment, in a tax-free transaction expected to be completed in the fourth quarter of 2023. As we discussed in last week's "Monthly Meeting" and in our commentary that followed , we think this decision is a win for shareholders. What remains of Danaher after the EAS separation could see its price-to-earnings multiple expand from current levels because it's shedding a slower-growing, lower-margin asset. The new Danaher will be even less cyclical with a higher percentage of recurring revenues. Meanwhile, EAS is a high-quality asset in its own right; an industry leader organically growing at a mid-single-digit clip with solid margins and strong free cash flow generation. It's a great business but it didn't fit in the biomedical direction Danaher has moved towards. Due to the scarcity of industrial assets that address environmental, social and governance (ESG) concerns, we think EAS may be worth more as a standalone asset than inside Danaher. Danaher shares have fallen about 3.5%, or $10, since the company made these two announcements last Wednesday after the closing bell, compared to a roughly 2.9% decline in the S & P 500 . Danaher isn't a cheap stock on a price-to-earnings basis, making rising interest rates a headwind to valuation. But we think this recent underperformance on great news that was a true surprise creates a long-term opportunity to buy shares of a high-quality company run by a management team that's always looking for ways to create value for shareholders. As for TJX, which owns T.J. Maxx, Marshall's and HomeGoods brands, we've been waiting to add to our position in this off-price retailer below our average cost basis, and the recent selloff in the market has finally put the stock at our levels. We believe the inventory glut across retail right now has created a nirvana moment for the off-price chains. When brand name merchandise starts to pile up and stores need to make room for new fashion and season trends, they are forced to mark down the excess inventory and offload it to companies like TJX, who opportunistically pounces on the high-quality brands and sells it to customers at fire-sale prices, creating a treasure-hunt experience that shoppers love. TJX Companies is the best operator in the off-price group and has been far more consistent than peers Ross Stores (ROST) and Burlington Stores (BURL). We also like how management believes the business will return to pre-Covid pre-tax margins of 10.6% within three years, driven by better profitability from merchandise opportunities, the moderation of expense headwinds like freight, and continued focus on expense management. (Jim Cramer's Charitable Trust is long DHR and TJX. 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.

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