After the decline on Thursday, Jim Cramer's inclination was to buy biotech stocks. But, in many cases, it is too late to get out. So many investors sold biotechs in the first quarter, now the group seems sold out.
"I think it is worth reminding you of a major caveat: biotech investing is hard! This entire group is full of land mines just waiting to be set off," the "Mad Money" host said.
Cramer warned investors to be very careful when speculating on development-stage biotechs, because the sector is extremely volatile. Even high quality stocks can implode.
One example of this is with Incyte Corporation, a biotech company focused on anti-cancer drugs that roared 6 percent on Thursday on strong phase 3 results for a rheumatoid arthritis therapy that it is working on with Eli Lilly.
However, even after its rebound on Thursday, Incyte has still lost 43 percent of its value since its highs in September.
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Cramer thinks the decline is partially due to negative sentiment in the biotech and pharma space after Hillary Clinton declared her standpoint against higher drug prices.
A lot of what went wrong was specific to the company, though. Incyte rolled out results of its phase 3 trial of a drug designed to prevent growth in tumors, and the stock was slammed because Wall Street didn't like the safety data. The stock also took a blow when, alongside strong quarterly results, the company announced it was discontinuing a phase 3 trial of its pancreatic cancer drug.
"This is an important cautionary tale, because Incyte is a legitimate company with real earnings, real growth and a really exciting pipeline. However, when the market turned on this whole group, Incyte sold off just like any other speculative biotech — that is a real danger," Cramer said.
Another cautionary example cited by Cramer was Portola Pharmaceuticals, a development-stage biopharma play that specializes in treading blood clots and other blood diseases. It was a stock that was all about two drugs in the pipeline, and a single bad clinical trial result took it down to one in the blink of an eye.
"You can't expect this kind of thing; it is simply an inherent risk of owning development stage biotech stocks," Cramer said.
So, why does anyone bother owning speculative biotechs?
The flipside to these two scenarios is that while investors must be careful, the group can also soar like Medivation, which roared on a takeover speculation.
So, while some investors may want to own early-stage biotech stocks, Cramer wants investors to remember that they can lose a tremendous amount of value in the blink of an eye. The group is not for the faint of heart and certainly not for a retirement fund.