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.

Trade-Ideas LLC identified

Red Hat

(

RHT

) as a "barbarian at the gate" (strong stocks crossing above resistance with today's range greater than 200%) candidate. In addition to specific proprietary factors, Trade-Ideas identified Red Hat as such a stock due to the following factors:

  • RHT has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $60.0 million.
  • RHT has traded 968,067 shares today.
  • RHT traded in a range 204.2% of the normal price range with a price range of $2.43.
  • RHT traded above its daily resistance level (quality: 16 days, meaning that the stock is crossing a resistance level set by the last 16 calendar days. The resistance price is defined by the Price - $0.01 at the time of the signal).

Stocks matching the 'Barbarian at the Gate' 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 positive price action. In this case, the stock crossed an important inflection point; namely, 'resistance' while at the same time the range of the stock's movement in price is more than twice its normal size. This large range foreshadows a possible continuation as the stock moves higher.

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More details on RHT:

Red Hat, Inc. provides open source software solutions to enterprise customers worldwide. It develops and offers operating system, virtualization, middleware, storage, and cloud technologies. RHT has a PE ratio of 71.4. Currently there are 19 analysts that rate Red Hat a buy, no analysts rate it a sell, and 4 rate it a hold.

The average volume for Red Hat has been 1.3 million shares per day over the past 30 days. Red Hat has a market cap of $12.3 billion and is part of the technology sector and computer software & services industry. The stock has a beta of 1.48 and a short float of 4.2% with 7.60 days to cover. Shares are down 3% year-to-date as of the close of trading on Wednesday.

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TheStreetRatings.com

Analysis:

TheStreet Quant Ratings

rates Red Hat as a

buy

. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the ratings report include:

  • RHT's revenue growth has slightly outpaced the industry average of 10.3%. Since the same quarter one year prior, revenues rose by 15.0%. 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.
  • Net operating cash flow has increased to $132.99 million or 39.75% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -1.21%.
  • RED HAT INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, RED HAT INC increased its bottom line by earning $0.93 versus $0.77 in the prior year. This year, the market expects an improvement in earnings ($1.58 versus $0.93).
  • The gross profit margin for RED HAT INC is currently very high, coming in at 87.64%. Regardless of RHT's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, RHT's net profit margin of 10.51% is significantly lower than the industry average.
  • Despite currently having a low debt-to-equity ratio of 0.58, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.25 is sturdy.

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