Is Red Hat, Inc. (RHT) A Good Stock To Buy?

A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended September 30, so let’s proceed with the discussion of the hedge fund sentiment on Red Hat, Inc. (NYSE:RHT).

Red Hat, Inc. (NYSE:RHT) investors should pay attention to a decrease in hedge fund interest lately. Our calculations also showed that RHT isn’t among the 30 most popular stocks among hedge funds.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 24% through December 3, 2018. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.


Cliff Asness of AQR Capital Management

We’re going to take a look at the recent hedge fund action regarding Red Hat, Inc. (NYSE:RHT).

What have hedge funds been doing with Red Hat, Inc. (NYSE:RHT)?

At Q3’s end, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -28% from the previous quarter. The graph below displays the number of hedge funds with bullish position in RHT over the last 13 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).


Among these funds, Arrowstreet Capital held the most valuable stake in Red Hat, Inc. (NYSE:RHT), which was worth $172.9 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $64.8 million worth of shares. Moreover, Two Sigma Advisors, Millennium Management, and Partner Fund Management were also bullish on Red Hat, Inc. (NYSE:RHT), allocating a large percentage of their portfolios to this stock.

Due to the fact that Red Hat, Inc. (NYSE:RHT) has faced falling interest from the aggregate hedge fund industry, it’s safe to say that there exists a select few funds that slashed their entire stakes in the third quarter. Interestingly, D. E. Shaw’s D E Shaw cut the largest investment of the 700 funds watched by Insider Monkey, worth close to $84.8 million in call options, and Brett Barakett’s Tremblant Capital was right behind this move, as the fund said goodbye to about $47.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 8 funds in the third quarter.

Let’s now review hedge fund activity in other stocks similar to Red Hat, Inc. (NYSE:RHT). These stocks are Hilton Worldwide Holdings Inc (NYSE:HLT), Sun Life Financial Inc. (NYSE:SLF), Xcel Energy Inc (NASDAQ:XEL), and Hewlett Packard Enterprise Company (NYSE:HPE). This group of stocks’ market values are closest to RHT’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HLT 45 3394338 -10
SLF 13 148464 1
XEL 21 456282 3
HPE 30 1102518 2
Average 27.25 1275401 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $1.28 billion. That figure was $634 million in RHT’s case. Hilton Worldwide Holdings Inc (NYSE:HLT) is the most popular stock in this table. On the other hand Sun Life Financial Inc. (NYSE:SLF) is the least popular one with only 13 bullish hedge fund positions. Red Hat, Inc. (NYSE:RHT) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard HLT might be a better candidate to consider a long position.

Disclosure: None. This article was originally published at Insider Monkey.