Cramer's 'Mad Money' Recap: What Moves Stocks
Cramer's next lesson about what makes stocks move dealt with newly minted stocks and how to navigate the volatile IPO market. He said it's impossible to ignore the quick 20%, 30% or even 100% gains that can be had in days, or sometimes minutes, from investing in IPOs. But these stocks can also carry a lot of risk as well.
The fact is, there's a lot of hype surrounding most IPOs, said Cramer, which is why many of them fizzle after their first day of trading. Facebook (FB) is a clear example of a company that came nowhere near close to living up to its first-day hype.
Don't let brokers tell you that every IPO is a great one, Cramer warned, because some issues are just not worth investing in. But sometimes the investment banks that bring stocks public have a secret agenda, bringing investors back to the market and rewarding their most loyal clients.
IPOs are, after all, about supply and demand, said Cramer, which is often why banks will limit the number of shares being offered to help engineer that first-day pop to the upside. They want to make sure their clients are able to make money, he said, which is why IPOs such as those of LinkedIn (LNKD) and Groupon (GRPN) were priced lower than they probably could have been given the demand for shares.
Investors who use a full-service broker and can get some shares of these under-priced deals should do so, said Cramer, but investors should never buy shares in the open market after the IPO because the inflated prices are rarely able to hold up for the long run.
Read the Fine Print
Just because a company's stock is coming public doesn't mean it should be, Cramer warned, which is why knowing how to research a coming IPO is more important than ever. What should investors be looking for in the prospectus? Cramer said he looks at everything including the company's management, its investors and which brokerage firms are bringing it public.
When it comes to management, Cramer said it's likely investors will have never heard of those at the helm. That's OK, he said, especially for tech companies. Nobody knew who Sergey Brin of Google (GOOG) or Mark Zuckerberg of Facebook were before their IPOs, but those companies seem to be doing OK, he added.
Next, Cramer said he looks at the company's investors. He said to be leery of companies with large private equity shareholders as they are often eager to cash out on the same IPO that they're enticing you to buy into. If firms have indicated they're investing for the long term, that's a good sign as they'll be right there with you.