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 momo momentum 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 $214.0 million.
  • RHT has a PE ratio of 47.1.
  • RHT is currently in the upper 30% of its 1-year range.
  • RHT is in the upper 25% of its 20-day range.
  • RHT is in the upper 35% of its 5-day range.
  • RHT is currently trading above yesterday's high.
  • RHT has experienced a gap between today's open and yesterday's close of 0.6%.

'Momo Momentum' stocks are valuable stocks to watch for a variety of reasons including historical back testing and price action. Market technicians refer to such stocks as being in a mark-up phase before a possible distribution period and price decline. Technical analysts and traders frequently find that the factors referenced above tend to create a temporary burst of strong wind in a stock's sail. Nevertheless, all successful traders must excel at maximizing gains while keeping losses to an absolute minimum. For that reason, the holding period on momo momentum stocks must always be a primary consideration, and this part of the puzzle is ultimately at the discretion of each individual's risk tolerance and portfolio risk management skills.

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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 47.1. 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 1.5 million shares per day over the past 30 days. Red Hat has a market cap of $13.8 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 4.6% with 2.61 days to cover. Shares are up 10.7% year-to-date as of the close of trading on Friday.

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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 robust revenue growth, growth in earnings per share, good cash flow from operations, solid stock price performance and increase in net income. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value.

Highlights from the ratings report include:
  • RHT's revenue growth has slightly outpaced the industry average of 10.0%. Since the same quarter one year prior, revenues rose by 15.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • RED HAT INC has improved earnings per share by 8.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, RED HAT INC increased its bottom line by earning $0.97 versus $0.93 in the prior year. This year, the market expects an improvement in earnings ($1.81 versus $0.97).
  • Net operating cash flow has increased to $217.38 million or 17.70% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -6.56%.
  • The net income growth from the same quarter one year ago has exceeded that of the Software industry average, but is less than that of the S&P 500. The net income increased by 5.8% when compared to the same quarter one year prior, going from $45.07 million to $47.70 million.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 34.61% over the past year, a rise that has exceeded that of the S&P 500 Index. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.

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