Cramer's 'Mad Money' Recap: Charting a Drug Run

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Too many people are avoiding drug stocks, and that's a big mistake, Jim Cramer told viewers of his "Mad Money" TV show Monday. Big Pharma remains the place to be, he said.

Cramer said he's been "banging people over the head with [his] Mad Money bat" telling them they need to own drug stocks, but since they're still not getting the point, he went to the charts to prove that these stocks are working.

Looking at the Morgan Stanley Cyclical Index, Cramer showed viewers that drug stocks have been outperforming cyclicals. Further, in a six-month chart of Abbott Laboratories (ABT Quote) overlaid with Caterpillar (CAT Quote), he pointed out that "Abbott, which isn't even a great stock, is crushing Caterpillar."

Similarly, looking at a chart of Johnson & Johnson (JNJ Quote), a stock that Cramer owns for his Action Alerts PLUS charitable trust, overlaid with a chart for Boeing (BA Quote) revealed how the drugmaker is outperforming the aerospace stock.

Even though Cramer has little faith in technical analysis, he said these charts tell a story that suggests this trend is going to continue. They tell Cramer that over the last few months, all of the big institutions on Wall Street, such as the hedge funds and mutual funds, have been selling off their cyclical holdings and piling into drug stocks.

In addition, these institutions are bailing on oil stocks -- money that Cramer contends should also go into pharma. When you have a trend, it generally lasts for the quarter, said Cramer, who, for that reason, believes "the drugs still have room to run."

Looking at drug stocks requires a different approach than looking at other types of stocks because "they are a function of one thing -- how strong and powerful and immune to generic competition their pipeline is," he said.

The pipelines predict future earnings. When looking at a drug stock's pipeline, three things should be considered: Does the company have products "that are just ramping," does it have good patent protection, and which company has the most interesting things in the works.