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From two secondaries, Cramer sees only one opportunity

Jim Cramer knows stock picking can be fraught with perils. However, he says, examining a secondary can speak volumes about future opportunity.

"When you are picking stocks you need to know where the real demand is and where it's not," Cramer said.

That is, you must discern whether a stock's advanced is due to fundamentals or some other catalyst.




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Although there's no fool proof method for making that determination, Cramer believes one of the best 'tells' comes from secondary offerings, and the immediate price action following the offering.

For example, looking at the secondary from Concho Resources, an independent oil and natural gas company with assets in the Permian, Cramer says the stock priced at $129. "That's about in-line with where the stock was yesterday but down almost five dollars from where it was the week before. However, there was so much demand at that level that the stock rallied to $131."

Cramer takes the positive price action as a sign that the stock's 20 percent gain year to date is largely predicated on fundamentals; also he takes it as confirmation the renaissance in domestic energy remains robust, and therefore investable.

For contrast, Cramer says look at the secondary from Examworks.

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"Examworks is one of dozens of companies that provides support services to the health care industry," Cramer explained. "It has good revenue growth, fine positive cash flow and earnings before interest taxes and depreciation but it is losing money on a reported basis."

"EXAM priced its secondary at $33.90 down from $35.30 the night before. The deal immediately failed, or broke the print price, dropping more than two bucks from the $33.90 pricing. That's disastrous."

Cramer takes the negative price action as a sign of caution. Year to date gains may be due to something other than fundamentals. Although catalysts can always change, "to me that secondary says the health care records sector may be facing serious challenges."

Call Cramer: 1-800-743-CNBC

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