Attendees walk past the Abbott booth during CES 2024 at the Las Vegas Convention Center on January 10, 2024 in Las Vegas, Nevada.
Ethan Miller | Getty Images
Shortly after the opening bell, we will buy 140 shares of Abbott Laboratories at a price of approximately $112. Following the transaction, Jim Cramer's Charitable Trust will own 700 shares of ABT stock, increasing our weight in the portfolio to 2.42% from 1.95%.
We buy more Abbott Laboratories In its recent weakness as we continue to believe that the market is overestimating the risks of litigation over infant formula.
Abbott's shares began falling Friday after the grand jury's order Reckitt Benckiser To pay $60 million to a plaintiff whose premature infant died of necrotizing enterocolitis, also known as NEC, after being fed Reckitt's Enfamil formula. Abbott was not involved in this case.
Whenever headlines like this appear, the market tends to shoot first and ask questions later. In this example, the market looked at the approximately 1,000 pending lawsuits filed by Abbott and multiplied that by the $60 million for one plaintiff — who was seeking a smaller figure of $25 million — and calculated that Abbott's exposure to the worst-case scenario could be To US$60 billion.
Here's Abbott's official statement: “Abbott has spent decades researching, developing, testing, and producing formulas and tonics for premature babies, and countless infants have benefited tremendously from these products. These claims are baseless, presenting a theory promoted by our attorneys.” Plaintiffs rather than the medical community, which considers these products to be part of the standard of care for premature infants.”
There are some key things to know from this statement. First, there is no scientific data showing that Abbott formula causes NEC although pending lawsuits allege that these premature babies developed NEC as a result of infant formula. Second, premature babies don't have many feeding options other than Abbott and Reckitt products. It is the standard of care because there is a lack of alternatives. This is a completely different situation Johnson & JohnsonTalc suit.
Since the news broke, Abbott's stock price has fallen about 6%, compared to a 1.4% gain in the S&P 500, and has lost about $14 billion in market value. We're not lawyers, but this reversal seems highly exaggerated based on the facts surrounding the situation.
Abbott Labs stock performance over the past month.
If Abbott attempts to settle all of the pending lawsuits, the final number will likely be far less than the market value the company lost, making this recent pullback a buying opportunity. We also bought some Abbott shares on Friday.
Wall Street analysts have commented on this issue.
JPMorgan said last week that it believes “the final number will likely be much less than the $60 billion involved… and we would have put the number at a fraction at best many years from now.”
In analyzing the Evercore ISI scenario based on historical context, analysts believe the settlement could be well below $250 million based on current outstanding cases. Wells Fargo is located in a similar area. The company estimated a potential settlement at approximately $280 million based on its assumptions about recent lawsuit settlement efforts.
Meanwhile, Jefferies analysts wrote: “The ultimate outcome is difficult to determine, but will likely result in a manageable fine for ABT.”
We don't want to make light of the situation because NEC is terrible. And we can't ignore the buzz this news has generated around Abbott Labs, a high-quality healthcare company with so much more to it than baby formula. It can continue for some time. However, when we compare the billions in market value lost over the past week to what a settlement could look like, our conclusion is that this sell-off is overdone.
(Jim Cramer Charitable Trust is long ABT. See here for a full list of stocks.)
As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade.
The above Investment Club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. No obligation or fiduciary duty exists or is created by your receipt of any information provided in connection with the Investment Club. No specific results or profits are guaranteed.
