Mad Money

Analyzing IPOs

Know Your IPO: Winners & Losers

Cramer finished his how-to lesson on IPOs Friday, after discussing the arcana of these deals and his three steps for vetting them, with a focus on analyzing the company that’s coming public.

There are a number of things to keep in mind, he said, when researching an IPO. Investors want to know everything from a company’s addressable market and its competitors to the company’s historic growth rate versus that of the market itself. And of course, you want to know whether the firm is profitable, and you have to understand the product being sold.

It may sound simple enough—knowing what a company sells—but product is important. There’s a big difference between a hot new sneaker and semiconductor miniaturization. And you should ask yourself if you like the product. Cramer knew Heely’s shoes with wheels were just a fad, and he traded the company’s IPO as if they were. Sure enough, the deal priced at $22, shot to the $30s and then dwindled down to as low as $1 and change a few years later.

But then there are products with staying power, such as athletic wear from Under Armour . In this case, the company was already profitable and it had solid financials. This meant that investors could trade the IPO, take some profits and then let the rest ride in UA as an investment. That was Cramer’s recommendation, and it played out. The stock jumped to $25 from its $12 deal price and then continued higher thanks to some classic Wall Street mispricing: Under Armour was being compared with Nike even though the former had a much higher growth rate.

Of course, two years later, with the stock in the $60s, UA moved into Cramer’s sell column. By then the company has saturated its addressable athletic-wear market and made the mistake of moving into footwear – Nike territory. As soon as Under Armour ran out of growth opportunities, investors had to take profits.

Every once in a while there is what Cramer calls a thrice-blessed IPO, meaning a profitable company with room to run, a big addressable market and a great underwriter. Case in point: Lululemon Athletica , the yoga apparel company that Goldman Sachs brought public at $18 in 2007. The stock tripled, but this company too eventually reached its saturation level and LULU became overvalued.

The trick is to know the size of the market, the power of the competitors and try to figure out how the company that’s coming public is valued against similar players, Cramer said. Deals like Under Armour or Lululemon, which were priced at a big discount to their peers, tend to be good.

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