We're selling some shares of this health-care company and changing our rating

Published Mon, Jul 24 20238:49 AM EDT

Shortly after the opening bell, we will be selling 125 shares of Johnson & Johnson (JNJ) at roughly $171.26. Following the trade, Jim Cramer's Charitable Trust will own 500 shares of JNJ, decreasing its weighting in the portfolio to about 2.96% from 3.67%. Johnson & Johnson is trading up in the premarket, adding to a solid rally that kicked off when the health-care company reported earnings last Thursday . While we are pleased to see J & J finally get some recognition for its positive fundamentals, our concern right now is that the stock is moving up for temporary reasons. When the stock popped 6% Thursday, we thought the move was driven by JNJ becoming an arbitrage play ahead of the Kenvue split-off. A split-off is when a company gives its shareholders the option to either keep shares or exchange some or all of their shares for new shares in the separated company. This is typically done at an exchange ratio that is determined by the relative market values of the two companies. As a way to entice shareholders of the parent company to participate in the deal, it is not uncommon for the parent company to offer up the shares in the separated company at discount to what it's worth in the market. Johnson & Johnson confirmed this morning it will offer Kenvue shares at a 7% discount. Even though J & J is monetizing its Kenvue stake at a discount to the market, split-offs work for the parent company because the exchange acts as a tax-free way to retire its outstanding share count without any cash outlay. Any time a split-off happens, it catches the interest of arbitrageurs. That's why we think the stock popped 6% last Thursday and has built on those gains. Investors are buying JNJ and selling short Kenvue with the interest of trying to capture a spread between the two companies. Though we are enjoying the gains over these past few sessions, it's best to sell some JNJ stock into this move and downgrade our rating to a 2 to not only protect against an unwind once the deal happens, but also due to our ongoing concerns about talc litigation. After the latest loss in California , we have become more skeptical about the company's ability to resolve its talc liability. This sale will cause us to realize a small loss of about 3% on stock purchased in May 2022. (Jim Cramer's Charitable Trust is long JNJ. 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.

A researcher works at the laboratory of the research and development plant of US multinational medical devices and pharmaceutical company Johnson & Johnson, in Val-de-Reuil, northwestern France

Charly Triballeau | AFP | Getty Image