Cramer: The Right Way to Trade Health Care

Cramer on Thursday said the potential downside in big pharmaceutical stocks far outweighs the upside their dividends. While the "Mad Money" host suggests staying away from drug makers, he still likes many other health care stocks.

One pharmaceutical name he continues to like, however, is Allergan . The medical aesthetics player produces a variety of products, but is best known for Botox. What separates it from other drug companies, Cramer explained, is that it takes a different approach. The company is not relying on a pipeline of new drugs to replace those it's losing to patent expirations. Instead of relying on new treatments, they are finding new uses for existing products.

In October, the Food & Drug Administration approved Botox as a treatment for chronic migraines, Cramer noted. The company is now seeking approval for Botox as a treatment for overactive bladders.

Meanwhile, one of the biggest trends in health care is the rise of generic drugs. While it may hurt big pharma, it's benefiting pharmacy benefit managers, like Medco Health and Express Scripts . PBMs administer prescription drug programs for insurance companies, so when the cost of drugs goes down, their potential for profits goes up.

Between Medco and Express Scripts, Cramer prefers the latter. It provides better risk reward, he explained, especially since it's trading at 12.8 times 2012 earnings — a 13 percent discount to Express Scripts. That's cheap since the company boasts a 17 percent long-term growth rate.

When it comes to HMOs, Cramer likes WellPoint . With 34 million members, it is one of the largest HMOs in the USA and is affiliated with Blue Cross Blue Shield, as well. As the economy improves, Cramer thinks its membership will rise because more people will gain employment. At that time, they will be able to afford to pay for insurance, or will have health insurance through their employer.

When this story was published, Cramer's charitable trust owned Medco and WellPoint.

Call Cramer: 1-800-743-CNBC

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