Cramer's danger zone stock pick: Top oil MLP

Jim Cramer found that energy related master limited partnerships, or MLPs, were hit hard this year. This was courtesy of the plummeting price of oil and fears that the Federal Reserve will raise interest rates. However, considering the attractive yield and chatter among Wall Street analysts recently, Cramer wondered if it was time to dig through the MLP rubble to see if there was anything worth investing in.

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Cramer was especially interested in this group because the Alerian MLP ETF made a new four-year low earlier this month, the price of oil appears to have stabilized and the slowing global economy could signal that the Fed will wait before it tightens.

Thus, many analysts have begun to note that high-yielding MLPs could be more attractive versus bonds. Just last week, Credit Suisse upgraded the entire group and pointed out that the average MLP sports a 7.8 percent yield.

Additionally, Credit Suisse noted that when MLPs rebound, they do so dramatically. Since the financial crisis, Cramer stated that the MLP stocks have typically provided a 40 percent return in the first eight months after they bottom. However, first the stocks need to stop going lower.

"I certainly think there is plenty of value to be found in the energy related master limited partnerships, but this is one area where you really need to pick your spots. Thanks to the recent selloff, the whole MLP space has been taken down in lockstep, the good coming down with the bad," the "Mad Money" host said. (Tweet This)

That means that while there are some MLPs out there that are dramatically undervalued, others could still be dangerous and deserve to go lower.

Workers work on an oil line pipeline in Decatur, IL.
Brad Quick | CNBC

In Cramer's playbook of rules in the current environment, he emphasized to own the MLPs with the least commodity price exposure, such as the pipeline plays. Pipelines tend to operate like a utility, changing a fee based on the volume of oil or gas that it transports. Thus, it has less of a direct connection to the actual price of oil.

With this in mind, Cramer presented a case study of two very different MLPs that reported recently and moved down together: Plains All American Pipeline, and Energy Transfer Partners. Plains All-American reported a bad quarter, and Energy Transfer reported a good one.

Yet, both stocks were crushed. What the heck?

In Cramer's opinion, it was the horrendous results from Plains All American that caused the entire MLP cohort to be slammed from its negative pin action.

Additionally, Cramer saw some enormous red flags from Plains All American. A large reason why investors own an MLP is because they assume that the cash distribution to shareholders will continue to increase. However management recently not only slashed its full year guidance, but it cut its distribution growth forecast down to 6 percent for 2015.

On the same day, Energy Transfer Partners and its general partner Energy Transfer Equity reported its results, which were pretty darned good in Cramer's opinion. And while the quarter seemed similar to that of Plains All American, when Cramer dug deeper he found that the results started to look different.

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Management indicated that it is on track to continue growing the distribution going forward. Meaning, the yield can go higher even if the stock does nothing—unlike Plains.

"So when you buy Energy Transfer Partners for its 8.15 percent yield here, you can take some comfort in knowing that the distribution is not only safe, it's also still growing," Cramer said.

At a time when the MLPs seem ripe for the rebound, Cramer warned investors to be careful. Only buy the strongest players in the space with the safest yields. That is why he is a buyer of Energy Transfer Partners and will stay far away from Plains All American. (Tweet This)

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