This Metric Says You Are Smart to Buy Rackspace Hosting, Inc. (RAX)

Rackspace Hosting, Inc. (NYSE:RAX) shareholders have witnessed an increase in hedge fund interest in recent months.

To most shareholders, hedge funds are viewed as underperforming, outdated investment tools of yesteryear. While there are greater than 8000 funds with their doors open at the moment, we hone in on the crème de la crème of this group, about 450 funds. It is widely believed that this group oversees most of all hedge funds’ total capital, and by keeping an eye on their highest performing equity investments, we have discovered a few investment strategies that have historically outpaced the S&P 500 index. Our small-cap hedge fund strategy outpaced the S&P 500 index by 18 percentage points per annum for a decade in our back tests, and since we’ve began to sharing our picks with our subscribers at the end of August 2012, we have outperformed the S&P 500 index by 23.3 percentage points in 8 months (check out a sample of our picks).

Just as important, bullish insider trading sentiment is another way to break down the investments you’re interested in. Obviously, there are a number of stimuli for a bullish insider to get rid of shares of his or her company, but only one, very simple reason why they would initiate a purchase. Plenty of academic studies have demonstrated the valuable potential of this tactic if “monkeys” know where to look (learn more here).

With all of this in mind, it’s important to take a gander at the key action encompassing Rackspace Hosting, Inc. (NYSE:RAX).

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

Heading into Q2, a total of 18 of the hedge funds we track were bullish in this stock, a change of 29% from one quarter earlier. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes substantially.

Of the funds we track, James Crichton and Adam Weiss’s Scout Capital Management had the largest call position in Rackspace Hosting, Inc. (NYSE:RAX), worth close to $49.2 million, accounting for 0.6% of its total 13F portfolio. The second largest stake is held by Jim Simons of Renaissance Technologies, with a $41.5 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other hedgies that are bullish include Steven Cohen’s SAC Capital Advisors, Philippe Laffont’s Coatue Management and Bill Miller’s Legg Mason Capital Management.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Scout Capital Management, managed by James Crichton and Adam Weiss, assembled the largest call position in Rackspace Hosting, Inc. (NYSE:RAX). Scout Capital Management had 49.2 million invested in the company at the end of the quarter. Steven Cohen’s SAC Capital Advisors also made a $15.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Philippe Laffont’s Coatue Management, John Murphy’s Alydar Capital, and Israel Englander’s Millennium Management.

How have insiders been trading Rackspace Hosting, Inc. (NYSE:RAX)?

Insider purchases made by high-level executives is at its handiest when the company in focus has seen transactions within the past half-year. Over the last half-year time frame, Rackspace Hosting, Inc. (NYSE:RAX) has seen zero unique insiders purchasing, and 14 insider sales (see the details of insider trades here).

Let’s check out hedge fund and insider activity in other stocks similar to Rackspace Hosting, Inc. (NYSE:RAX). These stocks are NCR Corporation (NYSE:NCR), Xerox Corporation (NYSE:XRX), ServiceNow Inc (NYSE:NOW), Gartner Inc (NYSE:IT), and Computer Sciences Corporation (NYSE:CSC). This group of stocks are in the information technology services industry and their market caps resemble RAX’s market cap.