Sell Block

First in the Sell Block tonight is Johnson & Johnson. Yeah, we know what you're thinking: How is this possible? The brothers Johnson is a blue-chip stock. It's best of breed!

Well, nobody stays best of breed forever. And no matter how you feel about a company's reputation, only the fundamentals matter at end of day. For this reason, JNJ should be sold.

The company’s pipeline is anemic. The only way a drug company can stay on top is by developing new drugs to replace the ones that go off patent, Cramer says, and JNJ just hasn’t done a very good job of this. Meanwhile, Risperdal - the most prescribed anti-psychotic in America and JNJ’s number-one drug - will go generic at the end of the year. Say goodbye to those profits. And Invega, the anti-psychotic designed to replace Risperdal as the big earner in JNJ’s drug cocktail, has been a total disappointment. A weak pipeline plus the patent loss for the biggest drug the company has and the hot new replacement drug was a flop? Time to sell JNJ if you haven’t already.

The second inmate in the Sell Block is Friedman Billings Ramsey, along with the IPO of its capital markets unit. FBR’s problem, and the reason Cramer doesn't want you to own this stock, is that it’s in many ways the opposite of Annaly: It has some terrible subprime exposure. But that's not the only reason Cramer wants you to sell.

In order to get itself out of trouble, FBR has decided to have an IPO for its capital markets division, which Cramer says everyone on the Street knows produces great research. This is the part of the business to like, the one that’s different from and better than its mortgage and investing units. So much better that you might be inclined to buy it when it comes public under a separate listing.

Cramer would advise against that, though. He says the numbers don't add up. FBR wants to raise as much as $243 million in this IPO by selling 13.5 million shares at $16 to $18 a piece. Go back to July of last year: FBR Capital Markets placed 18 million shares with a private-equity firm, which raised another $270 million. Just add up those figures and you’ve got $513 million worth of FBR Capital Markets. According to the Washington Post, FBR says it’s going to own 53% of the unit after the IPO, which equals a new company that’s valued at a little more than a billion dollars.

Hence the problem: How can FBR Capital Markets be worth a billion dollars and change when its parent company is worth only $993 million right now? Cramer wants to know. Apparently Friedman Billings Ramsey, minus its capital markets unit, is worth less than nothing. The investment business, the subprime business - they’re subtracting value from the rest of the company.

OK, maybe Cramer was oversimplying things - the other parts of FBR are worth something. The IPO isn’t a scam. But why would anyone buy a stake in a subsidiary of a company that, by some metrics, is worth nothing? Would anyone really want to buy FBR Capital Markets only to have its parent company take the money and bail out the rest of the junk, leaving investors holding the bag? On Mad Money we never, ever buy the subsidiary, Cramer says. You always buy the parent, unless it’s clearly troubled and potentially subtracting value from its subsidiary, like FBR.

Bottom Line: Time to sell JNJ, time to sell FBR, and when it comes public, stay away from FBR Capital Markets.

Questions? Comments?