Tech investors facing Alibaba headache

Cramer: All eyes on Alibaba
Cramer: All eyes on Alibaba   

As the Alibaba IPO nears, Cramer expects a slew of stocks to selloff. In fact, he believes his outlook was confirmed by weakness in the Nadasq on Monday.

The Dow Jones Industrial Average closed in positive territory, yet the Nasdaq closed lower. That suggests, "Pros are raising to buy Alibaba by selling winners in the same sector," Cramer said.

And because Alibaba is so desirable, Cramer thinks the selloff could be far greater than just the $23 billion Alibaba is expected to raise from the offering.

Jim Cramer speaks ahead of the Alibaba IPO on Mad Money.
CNBC
Jim Cramer speaks ahead of the Alibaba IPO on Mad Money.

"The more people talk about how exciting the deal is and how it is worth more than where it will be priced, the more that funds and individuals will clamor for the stock," Cramer explained.

And if an institutional investor can get at least a percentage of their desired position at the IPO price (which in the case of Alibaba is currently rumored to be around $70), then Cramer says a pro will look to purchase more shares in the open market at a higher price, and average up.

"That's how a hot stock works," Cramer said. And it's a problem for the broader tech sector.

Confused? Here's an example.

"If a fund manager gets his first million shares at $70 (the rumored IPO price) and then pays up in the open market for the rest, say four million shares, as high as $100, the blended average would be $94," Cramer said. And given the growth prospects, pros would consider $94 a bargain.

Therefore, if they want a sizable position, they need more cash; in the example above, an additional $24 per share.

"These funds, however, don't have that kind of cash so they have to sell stocks left and right to get the cash," Cramer said.

And from the price action in Monday's market, Cramer thinks funds are selling; Amazon, Baidu, Celgene, Chipotle, Facebook, Gilead, Google, Netflix, Salesforce.com, and Tesla.

"They are all being liquidated for Alibaba. Some will become buys when the selling is over," Cramer said, but looking at the sector broadly, the path of least resistance for many of them looks to be lower.

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Conversely, Cramer thinks Yahoo! will continue to climb as a proxy for Alibaba. "They have a huge stake in Alibaba and I think shares will continue to rise right into the deal. While those ten companies listed above are the obvious losers into the Alibaba deal, I think Yahoo is going to be the winner."


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