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Rackspace Hosting (RAX) Is Water-Logged And Getting Wetter Today

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified Rackspace Hosting ( RAX) as a "water-logged and getting wetter" (weak stocks crossing below support with today's range greater than 200%) candidate. In addition to specific proprietary factors, Trade-Ideas identified Rackspace Hosting as such a stock due to the following factors:

  • RAX has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $69.9 million.
  • RAX has traded 7.1 million shares today.
  • RAX traded in a range 214.2% of the normal price range with a price range of $3.09.
  • RAX traded below its daily resistance level (quality: 87 days, meaning that the stock is crossing a resistance level set by the last 87 calendar days. The resistance price is defined by the Price - $0.01 at the time of the signal).

Stocks matching the 'Water-Logged and Getting Wetter' criteria are worthwhile stocks to watch for a variety of factors including historical back testing and volatility. Trade-Ideas targets these opportunities because the stock is exhibiting an unusual behavior while displaying negative price action. In this case, the stock crossed an important inflection point; namely, "support" while at the same time the range of the stock's movement in price is twice its normal size. This large range foreshadows a possible continuation as the stock moves lower.

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More details on RAX:

Rackspace Hosting, Inc., through its subsidiaries, provides cloud computing services, managing Web-based IT systems for small and medium-sized businesses, and large enterprises worldwide. RAX has a PE ratio of 64.7. Currently there are 8 analysts that rate Rackspace Hosting a buy, 2 analysts rate it a sell, and 8 rate it a hold.

The average volume for Rackspace Hosting has been 1.5 million shares per day over the past 30 days. Rackspace Hosting has a market cap of $6.7 billion and is part of the technology sector and computer software & services industry. The stock has a beta of 1.43 and a short float of 14.3% with 8.75 days to cover. Shares are down 34.6% year to date as of the close of trading on Monday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates Rackspace Hosting as a hold. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, unimpressive growth in net income and disappointing return on equity.

Highlights from the ratings report include:

  • RAX's revenue growth has slightly outpaced the industry average of 9.4%. Since the same quarter one year prior, revenues rose by 17.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Although RAX's debt-to-equity ratio of 0.09 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.47, which illustrates the ability to avoid short-term cash problems.
  • The gross profit margin for RACKSPACE HOSTING INC is rather high; currently it is at 68.70%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, RAX's net profit margin of 5.95% significantly trails the industry average.
  • Net operating cash flow has declined marginally to $106.20 million or 2.73% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, RAX has underperformed the S&P 500 Index, declining 24.26% from its price level of one year ago. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last twelve months; and it could be down again in the next twelve. Naturally, a bull or bear market could sway the movement of this stock.

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