Don't be distracted by the glamour of red-hot initial public offerings, Jim Cramer said Monday, because there is sometimes vast potential in stocks that fall sharply after going public.
Take LifeLock, for example. The technology company offers identity-theft and fraud protection for individuals and businesses. When LifeLock went public last year, it priced at $9.50 a share, only to fall by 7 percent its first day of trading, to $8.36 a share. Three weeks later, the stock fell 23 percent from its debut to trade at $6.90 a share.
So what happened?
The disappointing IPO had nothing to do with the company's fundamentals, but with issues pertaining to market mechanics, said Cramer, host of " Mad Money ."
"Money managers couldn't figure out if they should view LifeLock as a simple consumer service provider or as a sexy cloud-based software as a service play, and they hate it when they don't know which box a stock belongs in," he said. "Making matters worse, this was a small IPO with a whole bunch of underwriters, so no individual investment bank had much of an incentive to make the deal work."
Today, LifeLock continues to boast strong fundamentals, Cramer said. The ID theft prevention services provider is a $1.4 billion company with a $7 billion addressable market, and Cramer thinks it has a lot of room to grow. Last week, the company reported strong earnings results, including better-than-expected earnings and revenue.
LifeLock's stock currently sells for 31 times next year's earnings estimates, which Cramer said is well below what many hedge fund managers would pay for a company with a 25 percent growth rate. In turn, he thinks this company has a strong growth story and recommended hat investors consider buying shares.
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