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Cramer on Ferrari—It could run over your portfolio

Cramer: Ferrari could run over your portfolio

One of this year's most heavily anticipated initial public offerings launched Wednesday, and its stock price was off to the races. Ferrari, the highest of the high-end luxury sports car makers, came public, and investors were excited to be able to scoop up shares of such an iconic franchise for the first time.

However, that excitement brought a warning from Jim Cramer.

"Before you buy this stock simply because you are in love with the company's beautiful cars, which can cost as much as a decent sized house, I think it is worth taking a look under the hood in order to figure out what you're really getting when you buy shares of Ferrari," the "Mad Money" host said. (Tweet this)

In fact, when Cramer took a closer look, he found a company with a sexy product but not-so-sexy numbers. In addition to selling cars that are street legal, Ferrari has a decent sized race car business. It also sells engines and various Ferrari-branded swag to capitalize on its popularity.

What is most important in this deal isn't what investors will be buying with the Ferrari IPO; it is who is doing the selling.

Will Ferrari's stock leave you in the dust?

Given the company's anemic growth rate, I think that is a fairly expensive price to earnings multiple
Jim Cramer

Ferrari actually belongs to Fiat Chrysler, which had a 90 percent stake in the company before the IPO. Ten percent of that stake has now been sold to the public, so it now claims an 80 percent stake. This deal was the first step in a spin off that will result in the complete separation of Ferrari from Fiat Chrysler.

Fiat Chrysler believes that Ferrari can get a higher valuation as an independent company, which made sense to Cramer. However, Ferrari is not like other automakers. In its IPO prospectus, the company stated that demand outstrips supply for Ferraris, and it plans to keep it that way.

Meaning, it deliberately limits the supply of new cars to bolster its strategy of selling cars at such a high price. And while that is great for pricing, it is bad news for growth; it's hard to grow a business that isn't willing to sell more cars.

But the main reason that Cramer is not a fan of Ferrari's stock is the valuation. At its current price of $55, Ferrari has a market capitalization of $10.5 billion and trades at 31 times last year's earnings.

"Given the company's anemic growth rate, I think that is a fairly expensive price-to-earnings multiple," Cramer said.

Especially considering that General Motors trades at just 11 times earnings, Ford sells for 13 times earnings and Fiat Chrysler for 18 times earnings. Ferrari's valuation leaves all of these companies in the dust. So, while it has a better product than its competitors, it doesn't have better financials. Cramer would rather own Fiat Chrysler.

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Of course, it is important to remember that this IPO has only put 10 percent of its share count on the public market. Fiat Chrysler still owns 80 percent, and it plans to spin off the remaining shares sometime in early 2016.

"In other words, in a few months a huge slug of additional stock will get dumped on the market, and I bet Ferrari's share price gets slammed. If you want to buy this one, I suggest you wait until Fiat Chrysler unloads the rest of their stake, giving you a better buying opportunity," Cramer added.

No matter how amazing the product is, Cramer simply cannot get behind a stock at these valuation levels. They are exorbitant given the company's slow growth rate. That doesn't mean the stock can't go higher, it just means that it is too darned risky for Cramer.

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