We’re trimming a winner we still believe in to raise some cash and right-size our position
We’re selling 100 shares of Eli Lilly (LLY) at roughly $311.78 each. Following Thursday’s trade, the portfolio will own 350 shares of LLY — decreasing its weighting to 4% from 5.12%. Big picture: We do not want to take too much out of the market right now — hence the Lilly trim — because we see reasons to be constructive at these levels. The market is still in a heavily oversold territory based on the S & P Oscillator, which clocked in at minus 9.28% after Wednesday’s session. Any time the oscillator is that low, it indicates that the market is technically oversold and positioned for a bounce. That, coupled with the recent rollover in many commodities and the decline in bond market rates should help buoy stocks for as long as this trajectory holds. The 10-Year Treasury yield has been moving down toward 3% after soaring last week to 2011 highs of nearly 3.5%. At the same time, however, Eli Lilly has been a great winner in the market this year, a rarity in a sea of red. We do not want to be greedy like we were with our oil names. We made a mistake not trimming our energy stocks at higher prices. We do not want to make the same mistake twice. Shares of Eli Lilly have gained about 11% this year in a turbulent market, with the S & P 500 confirming earlier this month that a bear market began in early January. A bear market is defined by a drop of 20% or from a prior high, which for the S & P 500 was a record. LLY shares have also outperformed the market nicely dating back to our upgrade to a 1 rating in late April . Since the upgrade, LLY shares have gained a little more than 5% against a roughly 8% decline in the S & P 500. But now we are downgrading LLY back to a 2 rating , meaning we would wait for a pullback before buying it again. In booking profits and rightsizing our position in Eli Lilly, we’re taking a solid win here and locking in a gain of about 25% on stock purchased in October 2021. We have a long list of reasons to like Eli Lilly, evident in this year’s outperformance. But with those gains, the stock became our biggest position at slightly more than 5% of the portfolio before the Thursday’s trim. This is what we call a high-quality problem. But still, this is where portfolio management kicks in, and why it’s prudent to reduce Lilly’s relative weighting to the rest of our holdings. We don’t want to sell too large of a chunk because of how much we believe in Eli Lilly for the long term. However, cashing out on shares not far from its highs Thursday will not only allow us to reduce LLY’s weighting to a more normalized level, it will allow us to recycle that cash into other stocks of high-quality — profitable companies that have been beaten down this year. In addition, cash raised from this sale will come in handy for whatever twists and turns the market throws at us next. Despite our trim and our wait-and-see rating, we continue to believe Eli Lilly is right stock for this moment because it’s one of the, if not, the best growth stories in all large-cap pharma. By now, you know how bullish we are about Lilly’s pipeline and all the great work they’re doing to combat not just Type 2 diabetes and obesity but Alzheimer’s, too. We remain incredibly bullish on Mounjaro , FDA-approved for diabetes and in clinical trials for treating obesity. We still believe the consensus on Wall Street has failed to appreciate how enormous of an opportunity this will be. Eli Lilly is also the type of stock that investors love to circle the wagons around when they are worried about a Federal Reserve-mandated slowdown, which is underway to fight inflation. The recession-resistant traits of health care are why we have so many stocks from this sector in the portfolio and recently built up positions in Johnson & Johnson (JNJ) and Humana (HUM). (Jim Cramer’s Charitable Trust is long LLY, JNJ and HUM. 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.
