Cramer thinks any one of the following 3 stocks deserves a spot inside a properly diversified portfolio.
That's because they're all spec stocks – that is, stocks that present higher risk but also offer higher reward.
Although Cramer doesn't advocate making speculative stocks a large percentage of the portfolio, he does think they play an important role, especially for individual investors, because he believes they keep individual investors engaged and motivated.
Cramer understands that the number of spec stocks to consider is almost countless, but he thinks in the current market, small and mid-cap biotechs may deserve immediate attention.
"Again, there's greater risk but the upside potential is enormous," Cramer said.
In the spirit of higher risk / higher reward stocks, Jim Cramer has 3 ideas for you.
"Vertex is a play on cystic fibrosis, a nasty genetic condition that messes up the body's ability to regulate sweat production, certain aspects of digestion, and worst of all, it can make your lungs fill up with mucus," explained Cramer.
Although the company already makes a treatment called Kalydeco, he said they have another drug in the pipeline that's showing great promise.
"It's called VX-809 and is now in phase 3 clinical trials. Based on the earlier study data, taken with Kalydeco, the combination can lead to significant improvements in lung function for cystic fibrosis patients."
Cramer said the phase 3 trial could be finished by the end of this year and the company could file for FDA approval in 2014. In addition, he added that the company has a third cystic fibrosis drug in phase 2 development and more data may become available as soon last later this quarter.
In addition, Cramer likes this stock for their Hepatitis C treatments.
"Their current drug Incivek, is being eaten alive by the competition, although it still generated over a billion dollars in sales last year. However, the company has two next generation Hep C drugs in phase 2 development. The street isn't expecting much from them, but they could give Vertex's pipeline a nice kicker," he said.
Taken all together, Cramer sees a lot of catalysts for this stock.
Sarepta is largely a bet on a drug called Eteplirsen, which is used to treat Duchenne muscular dystrophy, a rare genetic condition that leaves patients wheelchair bound by their teens.
"Back in October, Sarepta spiked up to nearly $45 on some downright miraculous clinical trial results, showing that their drug actually improved patients' ability to walk. I say miraculous because the current treatments for this disease only slow the deterioration, this drug may reverse it," Cramer explained.
Currently, Sarepta is trying to file for accelerated approval with the FDA in order to skip phase 3 trials. "That's a bold move that tells me just how revolutionary this drug could be," Cramer added.
"We'll likely get more clarity on this by the end of the month," Cramer explained and therefore the environment is somewhat binary.
That is, if the FDA says yes, the stock could roar. However, if the FDA refuses and Sarepta has to spend time doing additional trials, the stock could decline sharply.
Nonetheless, Cramer thinks the risk is worth the reward.
* If the scenario outlined above presents too much risk, but you remain interested, Cramer suggested waiting for the FDA decision. If it's negative and the stock declines, he suggests buying weakness because he thinks the long-term opportunity remains strong. Of course if it's positive, you'd have no entry point.
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In the case of NPS Pharma, Cramer said the play is a drug called Gattex used to treat short-bowel syndrome. "It's a rare condition where patients need to be fed intravenously for 12 hours a day because their intestines can't properly absorb nutrients.
"This company may have a drug with significant potential because two weeks ago management bought back the international rights to Gattex from Takeda Pharma for $50 million," Cramer said.
That's a significant move and one which Cramer interprets as a vote of confidence.
Also Cramer says the company has a second drug that could be very promising. "It's called Natpara, and threats hypo-parathyroidism," said Cramer. "It has yet to be approved in the United States, but NPS expects to file their new drug application with the FDA sometime in the second half. It could potentially do $350 million in peak sales."
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