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Cramer: 2 Recent IPOs I'd Avoid

AP

Housing may be coming back, but out of 3 related stocks that IPO'd this year, Jim Cramer suggested staying away from 2 of them.

"I'm talking about Zillow and Trulia," said Cramer.

Both are websites where potential renters and buyers go to find out all things real estate. Read More: Trulia vs. Zillow: The Battle for Online Real Estate
The companies make their money in part through regular display advertisements and that's part of the problem. "To some extent their business is more about online advertising rates than anything else," Cramer said.

To make matters worse, these so-called growth stocks may already be in a state of declining growth.

Looking at Zillow specifically, the company grew revenues at a 117% clip last year, but for 2012 it's only expected to grow at a 72% clip and in the latest quarter its revenue growth was just 67%.

"That's still very high on an absolute basis, but it's a major deceleration, and that's the kind of thing that makes growth oriented investors want to hit the road," Cramer explained.

Trulia's in a similar place.

"Again, the company's subscriber growth has started to decelerate," Cramer said. Although the company beat estimates when it reported on November 7th, the strength came from Trulia's media business – i.e. from display ads.

And perhaps the final nail in the coffin is price - Zillow and Trulia are expensive stocks.

"Zillow trades at 48 times next year's earnings, while Trulia trades at 103 times next year's numbers. They need to deliver stellar results, anything less, like their last quarters, and these stocks will keep getting sold," said Cramer.

A Better Bet

Cramer suggested looking at Realogy, which IPO'd in October. Unlike Zillow and Trulia, Realogy is not a web company. Read More: Realogy CEO Celebrates IPO at NYSE

"This is a real business, one that actually benefits directly from the rebound in housing," said Cramer.

Realogy owns 718 real estate brokers, mostly under the Coldwell Banker brand, and franchises thousands more brokerages under a host of brands, including Century 21, Coldwell Banker, Sotheby's, ERA, and Better Homes & Gardens Real Estate.

When one of Realogy's realtors sells a home, the company gets a commission, and the size of that commission is based on the sale price of the home.

That's how Realogy makes money - plain and simple. And right now both home prices and transactions are on the rise.

Currently the stock may be rich – "it's selling for 29 times next year's earnings with a 15% long-term growth rate," said Cramer, "but I would only buy this stock on a pullback."

What's the bottom line?

"Of the three recent housing related IPOs, I think you need to stay the heck away from Zillow and Trulia," said Cramer. "The only one I'll endorse is Realogy, but wait for a pullback before you pull the trigger."


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