Just because a company's stock is coming public doesn't mean it should be, Cramer warned, which is why knowing how to research a coming IPO is more important than ever. What should investors be looking for in the prospectus? Cramer said he looks at everything including the company's management, its investors and which brokerage firms are bringing it public. When it comes to management, Cramer said it's likely investors will have never heard of those at the helm. That's OK, he said, especially for tech companies. Nobody knew who Sergey Brin of Google ( GOOG) or Mark Zuckerberg of Facebook were before their IPOs, but those companies seem to be doing OK, he added. Next, Cramer said he looks at the company's investors. He said to be leery of companies with large private equity shareholders as they are often eager to cash out on the same IPO that they're enticing you to buy into. If firms have indicated they're investing for the long term, that's a good sign as they'll be right there with you. Finally, Cramer said he wants to know which brokerages are bringing a deal public. Some, he said, are better than others and have a reputation for doing right by investors. Firms like Goldman Sachs ( GS), Cramer's alma mater, won't stake their reputations on a questionable IPO, while a smaller, lesser-known firm might.
What Do They Do?
Cramer's last step to investing in a coming IPO is to analyze the company itself. What does it actually do? Is it profitable? How big are its end markets? Cramer said all of these are questions that investors need to ask. For some companies, especially consumer-facing ones like apparel companies or retailers, it's pretty easy to figure out what they do and how well they're doing it. But for others, such as complicated technology or biotech firms, this may be a more daunting task. But Cramer said a company with large end-markets, one that's profitable and one that's got a great brokerage behind it is what he calls thrice-blessed and has lots of room to run. Lululemon Athletica ( LULU) was one such company, he said. The yoga-based apparel maker was tapping into a huge market, was already profitable and had Goldman Sachs behind it. He said this stock continued to grow, even in the tough times of 2008 and 2009 because of its huge potential. Some of the best IPOs from 2012 included Annie's ( BNNY), Five Below ( FIVE) and Guidewire ( GWRE), all of which met these criteria, Cramer concluded. To sign up for Jim Cramer's free Booyah! newsletter with all of his latest articles and videos please click here.To watch replays of Cramer's video segments, visit the Mad Money page on CNBC. -- Written by Scott Rutt in Washington, D.C. To email Scott about this article, click here: Scott Rutt Follow Scott on Twitter @ScottRutt or get updates on Facebook, ScottRuttDC