[Beginning of Cramer's verbatim comments for this segment...]

Jim:        Tonight, we are going to do a little exercise in comparative stock picking… the kind of thing that we used to do all the time at my old hedge fund where I ran about $500m… we are trying to find superior companies with superior stocks… not to mention a superior attitude… and a superior state of mind… ala Cramer-fave Steven Segal as Mason Storm in the overlooked masterpiece of cinema known as “Hard To Kill”… we have got two major multinational healthcare companies… they seem like they are the same… both of them are at a crossroads… even though they are in the same business… same kind of product… headed in very different directions… it is my job as your investing coach to teach you how to identify the one that should be bought and the one that should be sold, sold, sold...

It is Abbott Laboratories (ABT*) which my charitable trust, ActionAlertsPlus.com owns vs. the colossus, the much loved and revered Johnson & Johnson (JNJ)… and because we want to be as rigorous and thorough as possible, we are starting off our comparison of these two pharmaceutical colossus of an Off The Charts steel cage death match… a total clash of the Titans… so what do the technicals say about these two stocks… at a glance, you might think the pictographs for the action for Abbott and JNJ pretend similar things… both stocks have rallied since the big sell off at the beginning of the year only to get caught in very tight narrow trading ranges recently… but Fitzpatrick, my colleague at RealMoney.com, and our chart master here on Mad Money… Abbott Labs is the very image of a stock that is about to break out to the upside… while JNJ looks ready to simply break down.

Why does Fitz like Abbott and dislike the brothers Johnson?…

Let’s start with Abbott, after spending seven months in purgatory… trading below the all important 200 day moving average… often, again, the gauge of what we are trying to benchmark… it is a key technical measure of a stocks long term trajectory… Abbott started to rally… it started to rally on higher lows… and then higher highs… higher lows… higher highs… leading to a big breakout in late September… there is that gap up… where the stock shot up above its 200 day moving average… see look at this, it just went right above its 200 day, that was very important… it rallied hugely… moving up 20% from its low in August to its high in October… that is a gigantic move and you want to catch that.

Normally after that kind of move you would expect the stock to come back down.. but Abbott sustained only a mild pullback in October on declining volume… this is just so bullish… you see it has this big run up and look at this, this little thing and the volume is nil… look at this, the volume does not matter at all… we really have an incredible thing developing here… something that the technicians, well like me, they have no need for due process… they skip past the Fifth Amendment, jump right to the polygraph… and this polygraph is showing you with volume high, or increasing volume, that is a move that is telling the truth… and lower declining volume like the pullback in Abbott right here… that is not telling the truth… so in other words, when Abbott pulled back the volume was very light… see underneath the average the volume… and that meant that you do not have to worry… the pullback was fibbing.

Now since its high in October, Abbott has been trading at a narrow range of between $50 and $52... but now it is about to break out again, Fitzpatrick thinks… and this move above $52.50 indicates the supply of stock, what the sellers are doing is exhausted.. .there is not enough stock… there is no lid here anymore… he thinks this one goes like that.

How about JNJ?…

Let’s take a look at JNJ because it initially looks the same but a really discerning technician gets this stuff… this is a stock that has stalled… this is actually a different chart… it does not look like… you had this big run, so did Abbott but JNJ rallied 33% from the March lows… that is a really nice rally… since the end of July… the stock has been stuck in this tight range… now that looks like a coiled spring but it is not… this is a total quagmire, a trading ? … and unlike with Abbott, Fitzpatrick thinks that the only way JNJ is escaping from this long term range is down… the reason… it is all again about the volume polygraph down here… JNJ is on balance volume… that is a technical indicator that measures whether we see more volume on the days that the stock is up or the days the stock is down… it has been declining… again, in this case the volume is showing a decline is where … big volume is when it goes down not when it goes up… unlike Abbott.

The stock began trading in its tight range three months ago… to chartists like Fitz that indicates that JNJ is being sold into its strength… every time it gets there… more stock, more stock, more stock… and it is called distribution… he is saying that the stock is being distributed… that is a parlance to technicians… not accumulated… in other words, shareholders are eager to sell this stock… not buy it…

Plus, back on October 12th, JNJ managed to break out of the top of the channel… like Abbott is doing now… and when that happened the stock was immediately hammered… crushed by selling and that caused it to… see right there is what he thinks is going to happen to Abbott… and it is going to go like this… but JNJ failed, it breaks out and then goes down… that is so negative… and then it broke thru the bottom of the channel… again, these are really important moves to chartists… that is really negative.

JNJ could not sustain the rally… instead it collapsed on itself … that is the technical picture… they may look the same but they are very different… Abbott is working and JNJ is slowly grinding lower as shareholders abandon the stock… and in this case, and I will tell you that after all the work I do it feels funny to say that the technicals and the fundamentals agree… Abbott is a much better company than JNJ… in fact, what is really amazing is that you do not need the huge amount of homework that I did with it too… the charts told you everything that I am about to tell you… everything that you needed to know to reach the appropriate conclusion were done by these pictures… I bet you that Fitz did not even know what the stock was… he did not even know that it was JNJ vs. Abbott… he just looked at the charts… I am stuck doing the work.

Abbott is a company that used a downturn in pharma to get stronger… building itself into a better business and ensuring future growth… Abbott beat and raised guidance when it reported October 14th… and it was courtesy of high quality sales… revenue prospects… JNJ delivered a manufactured better than expected… a manufactured beat based on lower R&D spending and lower taxes… while its sales declined by 5.3%… it violated Cascada’s first rule of investing, with a beat that was killing us… which is why we evacuated the JNJ floor… Abbott on the other hand should deliver an 11% earnings growth annually thru 2015... that is the best growth rate in big pharma… JNJ is going to struggle with 7% earnings growth… even though it is getting past many of its big patent problems.

Abbott has the better pharmaceutical business with Humira, its blockbuster rheumatoid arthritis drug, ask anyone who has RA, they know it is the right one… that is up 24% in the most recent quarter… along with a continued dominance of its drug alluding stint, Science, a powerful HDL cholesterol franchise… an impressive 10% growth in nutritionals… plus they recently stole, my term, the pharma business of a European company Solveig… which will boost earnings down the road and help the company take advantage of our nations week dollar as profits will be magnified when translated from Euros or other foreign currencies into shrinking green backs… by the way, that whole business is great, because it is big in the emerging markets that Abbott was not.

How about JNJ?…

Well let me see the chart because this is what is happening… it’s base pharma business is in a long term decline… because of patent issues with four of its biggest drugs, Flox for chemotherapy, Remicade for autoimmune, Velcade for a type of blood cancer, and its huge antipsychotic Risperdal… these are all going off of patent or are already off patent… JNJ is falling off a patent cliff… not making up for it with new products.. which make up 5% of sales at JNJ vs. 24% at Abbott… in fact, JNJ’s new product launches will not catch up to Abbott until 2013... the medical device business… margins weak, staying that way because of pricing pressure… JNJ just announced that it is going to fire 6,000, 7,000 people to boost profitability… we want growth not firings when it comes to healthcare… JNJ cannot give us the growth that we need to own which is why it cannot break out… and ultimately will breakdown… despite that fact that Abbott is clearly the stronger player… it is only trading at a slight premium to JNJ… 12.7 times 2010 earnings vs. 12.4... that is ridiculous.

Here is the bottom line…

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The Bottom Line!:     The charts say that Abbott Laboratories (ABT*) is breaking out… Johnson & Johnson (JNJ) could be breaking down… the fundamentals tell the exact same tell… pretty simple… off of these charts and off of the fundamentals… you buy Abbott Labs and you sell JNJ… and my hat is off to the technicians… I have to tell you, their jobs may be easier… but sometimes they reach the exact same conclusion for much less effort…. that is pretty good.

[verbatim recap]

[end of segment]

*Note:  An asterisk next to a stock indicates that Jim owns it currently for his charitable trust.  If you are interested in a particular stock, Jim Cramer recommends that you always do the homework on each stock, and that you wait at least one trading week after his show recommendation to evaluate whether it is a good stock trade or investment for you. 

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