This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Red Hat Missed Guidance Isn't That Bad

Stocks in this article: RHT MSFT ORCL DELL CA IBM CRM INTU VMW

NEW YORK ( TheStreet) -- If you're a current Red Hat (RHT - Get Report) investor Wednesday's earnings release must have felt like getting caught in the rain without an umbrella while wearing your favorite Borsalino.

Red Hat's stock gained about 10% from a year ago and remains in a bullish trend. Red Hat's CEO James Whitehurst announced passing of the billion-dollar mark in annual revenue.

While part of the weakness looking forward is blamed on the strong dollar and economy, investors need to know that this is what happens when you invest in a company with a price-to-earnings ratio that takes over half a century in earnings to pay for a share (PE of 50). At least most of the market cap losses appear to be baked in the cake at this point.

Stocks with a price-to-earnings ratio over 20 have historically underperformed the market. Does this mean you should not invest in growth companies sporting multiples above 20? No; however, it does mean when you consider an investment such as Red Hat, you better be ready for a bumpy ride. Wednesday's fall was more turbulence than a shifting sentiment in the company or management.

Oracle's (ORCL - Get Report) recent earnings release was met with tempered enthusiasm and price appreciation. Everyone (except of course Red Hat) loves Microsoft (MSFT - Get Report) again after displaying the new Surface laptop/tablet/gizmo. Even with trumpets blaring for the Surface, the Internet is where everything is happening, and where there is Internet, there is Linux.

Where there is Linux, there is Red Hat making sure pages are served quickly and correctly. (Read my article Microsoft's Impressive Product Still Needs Perfect Execution.)

Based on my experience with gap downs following guidance similar to Red Hat, investors will likely see the short-term low Thursday or Friday. With Wednesday's closing price of $56.50 and after hours trading closing near $51, more downside pressure probably won't last long.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,416.85 +225.48 1.31%
S&P 500 2,021.25 +19.09 0.95%
NASDAQ 4,683.4070 +45.4130 0.98%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs