We're trimming an embattled portfolio stock facing a binary event that could go either way

Published Thu, Feb 29 202412:14 PM EST

We're selling 1,000 shares of Bausch Health Companies at roughly $9.38. Following Thursday's trade, Jim Cramer's Charitable Trust will own 2,930 shares of BHC, decreasing its weighting in the portfolio to 0.82% from 1.1%. We're trimming roughly one-quarter of our Bausch Health position to manage our downside risk ahead of a key event. Sometime late in the first quarter or early in the second quarter, the courts are expected to decide in Bausch's Xifaxan litigation. Xifaxan is Bausch Health's most important drug, accounting for approximately 40% of its revenue. If the ruling goes in the company's favor, it could prevent a Xifaxan generic entry until at least 2028. Preventing generic entry is crucial for the company's ability to operate independently, allowing it to spin off an 80% stake in the eye health company Bausch + Lomb in a transaction, which would unlock significant value for shareholders. As the likelihood of monetizing its BLCO stake increases, BHC shares are expected to trade appreciably higher. Analysts at Jefferies are the biggest believers that Bausch Health will win the Xifaxan legal battle. In this outcome, Jefferies thinks BHC is worth $16 per share on a sum of the parts basis, valuing the BLCO distribution at $13 and the RemainCo at $3. That's a lot of upside from the current trading price of roughly $9 per share. But the decision is not so clear-cut. If the courts rule goes against Bausch and Xifaxan faces generic competition earlier than 2028, management may be forced to explore other strategies for its Bausch + Lomb stake, including keeping it on a consolidated basis. In the event of a litigation loss, we would expect BHC shares to trade significantly lower because it effectively rules out the benefit of a value-unlocking transaction. BHC 1Y mountain Bausch Health Companies 1 year What we have on our hands is a binary situation and the outcome could go either way. Jefferies has done a lot of work around the litigation — but at the end of the day, the decision is completely in the hands of the courts. We have expressed several times that when a company is at the hands of the courts, it is simply too hard to game. For example, Johnson and Johnson 's inability to move past its talc litigation was why we sold the stock last summer and haven't looked back. This type of uncertainty at BHC is why we've kept an isolated position in the portfolio, and we've withheld a stock rating with our 4 designation and removed our price target. As we approach the decision in a few weeks, we feel it is necessary to take action to safeguard the portfolio against steeper potential losses. To reduce our risk, we are selling 25% of this small position. By only selling some, we can still benefit from any positive outcome and capture potential gains. However, if the decision goes against us, this sale will protect us from incurring even greater losses. It's never enjoyable to make a sale that realizes a loss of more than 60% on stock purchased from late 2021 to early 2022. However, if such a sale can protect us from further losses while still providing the opportunity to participate in potential upside, then it is a wise move to make. (Jim Cramer's Charitable Trust is long BHC. 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.