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Is Rackspace Hosting, Inc. (RAX) A Good Stock To Buy?

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The equity market returns were very disappointing in the third quarter, “thanks” to the slowdown of China’s economy and the weaker-than-expected U.S. economic data. It was not entirely clear whether the broader market sell-off made U.S. equity valuations undervalued, but it definitely made them more attractive. It is worth mentioning that Russell 2000 ETF (IWM) underperformed the broad-market S&P 500 ETF by more than 14 percentage points during the period of June 25, 2015 through October 30, 2015. This clearly points to the fact that most investors, including hedge fund firms and institutional investors, heavily cut their exposure to high-potential (but seemingly riskier) small-cap stocks during the bloody third quarter. So let’s take a glance at the smart money sentiment towards Rackspace Hosting, Inc. (NYSE:RAX) and see how it was affected.

Rackspace Hosting, Inc. was in 30 hedge funds’ portfolios at the end of the third quarter of 2015. RAX investors should pay attention to a decrease in enthusiasm from smart money lately. There were 37 hedge funds in our database with RAX positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a decline in popularity but it may still be more popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Blue Buffalo Pet Products Inc (NASDAQ:BUFF), HEALTHSOUTH Corp. (NYSE:HLS), and DealerTrack Technologies Inc (NASDAQ:TRAK) to gather more data points.

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According to most shareholders, hedge funds are perceived as underperforming, old investment vehicles of the past. While there are over 8000 funds trading at present, Our researchers hone in on the crème de la crème of this group, about 700 funds. It is estimated that this group of investors handle the lion’s share of all hedge funds’ total capital, and by keeping an eye on their unrivaled equity investments, Insider Monkey has spotted many investment strategies that have historically surpassed the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy outperformed the S&P 500 index by 12 percentage points a year for a decade in their back tests.

Keeping this in mind, we’re going to take a gander at the fresh action surrounding Rackspace Hosting, Inc. (NYSE:RAX).

What have hedge funds been doing with Rackspace Hosting, Inc. (NYSE:RAX)?

At the end of the third quarter, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from one quarter earlier. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Clifton S. Robbins’s Blue Harbour Group has the largest position in Rackspace Hosting, Inc. (NYSE:RAX), worth close to $280.5 million, accounting for 8.7% of its total 13F portfolio. Coming in second is AQR Capital Management, led by Cliff Asness, holding a $52.2 million position; 0.1% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions consist of Barry Rosenstein’s JANA Partners, Israel Englander’s Millennium Management and Jim Simons’s Renaissance Technologies.

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