Did Hedge Funds Forseen the Quarterly Performance of these Two Companies?

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Open source software solutions provider Red Hat Inc (NYSE:RHT) and recreational vehicle (RV) manufacturer Thor Industries, Inc. (NYSE:THO) both came out with their latest quarterly results yesterday after the bell. Whereas the former managed to beat the Street’s expectations, the latter’s results came in below the estimates. In this article we are going to take a look at the results of both these companies and the hedge funds’ sentiment towards them to see if an actionable pattern emerges out of it.

Software Developer

Let’s start with Red Hat Inc (NYSE:RHT), which reported EPS of $0.47 for the second quarter of fiscal 2016, an almost 15% increase on the year, while the revenue came in at $504.10 million, significantly above the $445.90 million delivered a year earlier. The consensus estimate among analysts was for the company to report EPS of $0.44 on revenue of $494.65 million. Although revenue for the quarter was up 13% year-over-year in US dollar terms, excluding currency headwinds it was up 21% year-over-year. Quarterly subscription revenue for Red Hat Inc (NYSE:RHT) was up by an annual 13% to $442 million, whereas its operating cash flow saw a 12% year-over-year jump to $120 million. For the next quarter the company expects EPS of $0.47 and revenue in the range of $519 million to $523 million. Additionally, for the full fiscal year 2016 Red Hat forecasts EPS between $1.85 and $1.87 and revenue in the range of $2.03 billion to $2.04 billion.

Although shares of Red Hat have lost some sheen in the past couple of weeks, the rally that they saw from March to July has ensured that they are still trading up by 4.66% year-to-date. The number of hedge funds covered in our database that reported a stake in Red Hat jumped by seven to 40 during the second quarter, while the aggregate value of their holdings saw an increase of $203 million to $754.4 million. Billionaire David E. Shaw‘s D.E. Shaw, Brett Barakett‘s Tremblant Capital and Ken Griffin‘s Citadel Investment Group were among the investors that increased their holdings in the company significantly during the second quarter and reported some 1.10 million shares, 891,300 shares and 820,100 shares of Red Hat in their respective 13F filings. With the company delivering better than expected results and its popularity among hedge funds rising, we feel the stock of Red Hat has everything going for it to appreciate in the medium- to long-run.

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically underperformed the S&P 500 Total Return Index between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning 118% and beating the market by more than 60 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise (while avoiding their high fees at the same time) rather than large-cap stocks.

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