Mad Money

Cramer’s hazard alert: These stocks are toxic

Follow the Amazon army?

(Click for video linked to a searchable transcript of this Mad Money segment)

The market is shifting. And Jim Cramer says the changes have made some stocks almost radioactive.

"For the longest time there weren't many hazardous stocks in the stock market," Cramer said. But now there are. "I think it's important to isolate the losers and cordon off the losses."

Here are some of the kinds of stocks that concern Cramer:

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Amazon Army

"The first category is what I call the Amazon Army," Cramer said, referring to stocks that were bid higher on the promise of growing revenue but not profits.

At the time, the market was hungry for growth and stocks in this category satisfied that need; therefore they commanded a premium.

"However, with the economy improving, so-called value companies have started doing better on both top and bottom lines," Cramer noted. As a result, the market has turned against the Amazon Army—companies that only show improvement on the top line.

That's not to say the outlook for Amazon or any other company in this category has changed. "None of these companies have done anything wrong. In fact, Amazon blew the doors off the sales number. It's that hedge funds have jilted them. They now prefer profits to sales," Cramer said.

It's not a referendum on the business, he noted. Therefore, an Amazon Army company could execute well and its stock could still tumble.

Dilutive IPOs

"The second kind of lethal stock can be found in an area of the market where new offerings not only threaten to dilute business but arm rivals with new capital," Cramer said.

The "Mad Money" host suggested Rubicon Project may be the poster child for this kind of hazard.

"There are two competitors waiting in the wings that will come public within the next month or two that are in the exact same space Rubicon's in, tools for Internet advertising."

Those rivals will likely attract investment dollars that would have otherwise gone to Rubicon, in turn making it more likely these types of shares will go lower.

Biotech Babies

Finally, Cramer thinks many newly public biotech stocks could be downright poisonous. He's particularly concerned about biotechs that recently IPO'd but whose drugs may still be in earlier stages of development.

Adding to the danger, Cramer noted that there are also new reasons to invest in big pharma.

"There's merger-and-acquisition talk surrounding virtually every major drug company. Who needs an expensive high flier when so much good is happening to the cheap ones?"

All told, unless a young biotech has a specific fundamental catalyst, Cramer believes these stocks will have a hard time attracting buyers.

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The Bottom Line

"Once, all of these stocks could do no wrong," Cramer said. "Now they can do no right." Although he believes the rotation will ultimately end, Cramer also says it could last longer than you think.

"These are the kinds of movements that go to extremes before they correct, and I don't think we've reached those extremes," he said.

So, if you're sniffing around any of the types of stocks noted above, proceed cautiously. In fact, you may do well to slip into a hazmat suit.

Call Cramer: 1-800-743-CNBC

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