How to Play IPOs

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Jim Cramer

Analyzing a company’s initial public offering is not easy, since it depends on the price of the offering and the amount of shares being offered, Jim Cramer said Friday on CNBC's "Mad Money."

The bankers don’t always offer all the outstanding shares, and the price may just be the “price talk” — meaning it is the initial price and not the last price.

Another important variable is what Cramer calls the “sliver” offering — where bankers offer just a fraction of the outstanding shares in order to generate excitement and cause the stock to pop. Those are the deals Cramer likes.

“Any deal where a new company offers less than ten percent of the company on the IPO is one I want you in on, even if I don't like the company,” he said.

However, he has very specific rules of engagement — get in on the stock offering and then “ring the register” when it opens.

Take Groupon , for example. There were 640 million shares of GRPN but the bankers only offered 40 million shares for its IPO. Cramer said that offering almost assured that demand would exceed supply. Groupon was priced at $20, it opened at $28 and then traded to $30. After that it began a “long, ugly slog down.” It ultimately traded at $15. On Friday, it closed at $9.97 a share.

“Sometimes there's only two decisions to be made here, put in for a sliver deal and then to sell it into the pop,” Cramer said. “You time that sell to the very open of the hot deal. And you don't stick around for one red-hot minute longer. And never, never, never, buy in the after-market.“

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