What Smart Money Thinks of Red Hat Inc (RHT)?

Before we spend days researching a stock idea we’d like to take a look at how hedge funds and billionaire investors recently traded that stock. S&P 500 Index returned about 7.6% during the last 12 months ending November 21, 2016. Most investors don’t notice that less than 49% of the stocks in the index outperformed the index. This means you (or a monkey throwing a dart) have less than an even chance of beating the market by randomly picking a stock. On the other hand, the top 30 mid-cap stocks among the best performing hedge funds had an average return of 18% during the same period. Hedge funds had bad stock picks like everyone else. We are sure you have read about their worst picks, like Valeant, in the media over the past year. So, taking cues from hedge funds isn’t a foolproof strategy, but it seems to work on average. In this article, we will take a look at what hedge funds think about Red Hat Inc (NYSE:RHT).

Overall, Red Hat Inc (NYSE:RHT) has seen a slight decrease in hedge fund interest during the third quarter. The number of funds from our database long the stock declined to 34 from 35.  At the end of this article we will also compare RHT to other stocks, including Kimco Realty Corp (NYSE:KIM), Newell Rubbermaid Inc. (NYSE:NWL), and Universal Health Services, Inc. (NYSE:UHS) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Keeping this in mind, let’s take a peek at the recent action regarding Red Hat Inc (NYSE:RHT).

How are hedge funds trading Red Hat Inc (NYSE:RHT)?

Heading into the fourth quarter, 34 funds tracked by Insider Monkey were bullish on Red Hat, down by 3% from one quarter earlier. With the smart money’s capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Ken Griffin’s Citadel Investment Group holds the biggest position in Red Hat Inc (NYSE:RHT). Citadel Investment Group has a $246.3 million position in the stock, comprising 0.2% of its 13F portfolio. On Citadel Investment Group’s heels is Arrowgrass Capital Partners, managed by Nick Niell, which holds a $87.4 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Other professional money managers that are bullish comprise Brett Barakett’s Tremblant Capital, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and David E. Shaw’s D E Shaw.

Since Red Hat Inc (NYSE:RHT) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of funds who were dropping their positions entirely last quarter. For example, Dmitry Balyasny’s fund, Balyasny Asset Management, dropped its call options, about $7.3 million worth.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Red Hat Inc (NYSE:RHT) but similarly valued. We will take a look at Kimco Realty Corp (NYSE:KIM), Newell Rubbermaid Inc. (NYSE:NWL), Universal Health Services, Inc. (NYSE:UHS), and Ameren Corp (NYSE:AEE). All of these stocks’ market caps match RHT’s market cap.

As you can see these stocks had an average of 24 funds with bullish positions and the average amount invested in these stocks was $960 million. That figure was $986 million in RHT’s case. Newell Rubbermaid Inc. (NYSE:NWL) is the most popular stock in this table. On the other hand Kimco Realty Corp (NYSE:KIM) is the least popular one with only 11 investors holding shares. Red Hat Inc (NYSE:RHT) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard Newell Rubbermaid Inc. (NYSE:NWL) might be a better candidate to consider a long position.