Mad Money

IPO Jackpot: How to Beat the House


Usually, comparisons between the stock market and Las Vegas are loose at best. But in the wake of last week’s market massacre, there are some strong parallels to be drawn between the Street and the Strip. A casino will tilt the odds in your favor to get you back at the table. Wall Street does much of the same.

Banks underwrite IPOs and make a lot of cash when the companies go public. But there’s often a struggle between the investment banks, the company itself and the potential shareholders. While not always true, you can bet that right now the banks are going to favor you, the buyers, over their corporate finance customers. Remember: They need you back at the table.

And what are the odds? Cramer’s got a couple IPOs on the horizon that look good. Both are tech companies: The first is Big Band Networks, which will trade under BBND, and the second is SourceFire, which will trade as FIRE.

Big Band makes hardware and software to improve multimedia content over phone and cable networks, and also makes it easier to deliver targeted advertising content. Cramer loves this pick because it services both the cable and telco companies. It can’t lose. SourceFire deals in network security and monitoring. Cramer isn’t as enthusiastic about this one, but likes it against the new backdrop of IPO pricing.

So here’s how it’ll work. Big Band has a price midpoint of $11. Before the market started going nuts last week, the banks would probably increase the price a couple times before the initial offering. So instead of coming in at $11, it would open at $13 or $15. But since they need you at the table, they’re going to keep the price point at $11, giving you a deal. Cramer says Big Band could be a standout anyway. It’s got big-time growth potential, it’s in a good niche, and its similar enough to Cisco Systems that it should be worth about $20 per share. Cramer would buy it under $14 and sell it when it goes over $21.

Normally, Cramer would stop right there. No need to get greedy. But the environment for IPOs right now is so tilted in shareholders’ favor that the SourceFire IPO is just too tempting to pass up. It’s priced at $12 to $14 per share, and it doesn’t look like it should move too much. Compared to other security software companies, Cramer thinks the stock is worth about $16.50. So if you do your homework and get in on the initial price, you might be able to extend IPO nirvana.

Bottom Line: The SourceFire IPO is good, but not as good as Big Band’s. Both happen to be debuting at a great time because the banks are nervous. They would price these stocks higher, but they need you back, so they’re going to keep them lower to ensure that you don’t fold. Is it manipulative? Sure. But that’s how the game works. And this time, you could beat the house.

Questions? Comments?