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Drug Stocks May Soon Feel P&G's Woes

Cramer fears drugs stocks might get caught in the S&P selling pressure and index fund redemptions
Author:

How much more can this drug group stand? Can it just keep going lower and lower and lower?

Yes.

Here's why. First, they are not cheap. In an inflationary environment -- and with oil at $33 a barrel we are going to begin to get some real producer price problems -- drugs historically underperform.

Second, many of the drug companies have packaging costs that can't be passed on easily. We don't think of

Merck

(MRK) - Get Report

as a big consumer of pulp and paper like

Procter & Gamble

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(PG) - Get Report

, but many of the other drug companies have consumer product companies that do use a lot of these materials.

But, most important, they are big players in the

S&P

. In fact they are the biggest non-tech players. In a world where the redemptions for mutual funds that mimic the S&P are heating up, and where index funds will begin to feel real heat, these are the stocks that will get hit in the crossfire. These stocks get liquidated without a bid. Other than the companies themselves there are no natural buyers. The companies aren't generating Internet growth. The economy is too strong to own them. They are just ripe for the selling.

Oh yeah, and how much longer can these companies buy back stock instead of plowing their resources into developing new drugs? How much did they waste buying their stocks back at much higher levels?

No bargains here.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.