Why We're Downgrading Abbott to a Two

Following up on today's Daily Rundown video here, we are downgrading our Abbott Laboratories rating to a Two.

Additionally, we would be trimming our position today if we were not restricted from trading. For more information about our trading restrictions, please see our page here.

Before we talk about Abbott, we first want to mention that we don't want to raise too much cash right now because July tends to be a seasonally strong month for stocks. This positive view is based on the work of Larry Williams, a great technician who Jim highlighted the work of during last night's Mad Money and on today's video. According to Williams, if you bought the S&P 500 on the first trading day of July and then held for the next eight to 12 days, the trade was profitable nearly every year.

But even though we are about to enter a period where we should see some strength in the broader averages, we will not let this positive near-term view dissuade us from making a trim in a stock that we believe has gotten ahead of itself. We respect the charts and seasonal patterns, but we are fundamental investors through and through.

And we think the time has come to lock in some profits on Abbott Labs. Abbott was a tricky stock in the first half of the year. The stock opened the new year strong out of the gates and quickly rallied to all-time highs in the upper $120s just a handful of weeks into the year. But as the vaccine rollout in the United States accelerated in the spring and COVID-19 cases declined across the country, Abbott lost its momentum and began to sell-off due to worsening demand for its COVID-19 tests.

The single biggest day of declines occurred on June 1st, when the stock gave up all of its remaining year-to-date gains after the company lowered its full-year adjusted EPS outlook. The negative preannounced was made to reflect a "rapid decline in demand for COVID-19 tests," a trend that management anticipated would continue. ABT plummeted roughly 9% that day to about $106 per share.

While the market reaction to the news was to sell Abbott that day, we thought the weakness represented a great buying opportunity and we upgraded our rating to a One in our Alert here. As we explained later in the afternoon in our Alert here, we said the market was always skeptical of Abbott's ability to deliver on management's old guidance because it didn't view testing as a durable revenue stream. This concern but an overhang on the stock for months, and the overhang was finally lifted after the preannouncement. With testing revenues de-risked following the preannouncement, our confidence in Abbott's ability to meet its earnings per share goals grew because the focus of investors returned to Abbott's core business.

Which brings us to our decision to downgrade Abbott today and trim if we could. Abbott has been a very strong stock since our upgrade on June 1st. It's rallied nearly 10% from its preannouncement low compared to a roughly 2% gain in the S&P 500. And if you look a bit closer, and exclude today, the bulk of those gains have quietly come over the past four trading days. This quiet, but significant move, has helped the stock return to its pre guide down levels.

But here is our issue with the rally. We think the bulk of this move has been predicated on the belief that testing revenues could rebound again as the Delta COVID-19 variant continues to spread across the country and around the world. A bounce back in testing demand would be positive for Abbott's earnings this year, however, we would rather see Abbott rally for reasons that relate to its core business and pipeline (think areas like the FreeStyle Libre and other Medical Devices), not a revenue stream that will be temporary. We have been burned once by a rapid decline in testing demand, so we struggle to give Abbott any additional credit for this revenue stream over the long-term. That's why we think this recent rally in ABT represents a solid opportunity to downgrade our rating and lock in some profits.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long ABT.