Those familiar with open-source software, have heard of Red Hat (RHT) .
The company uses a community-powered approach to develop and offer open-source, middleware, virtualization, storage and cloud technologies. And Red Hat has delivered growth that outperforms its industry.
The stock is an undervalued pick that faces robust growth this year. The time to buy the stock is now, ahead of earnings that are likely to come in strong.
Red Hat belongs to a group of high-tech innovators that should soundly beat the market this year.
In 2012, Red Hat became the first $1 billion open-source company. The company was an early entrant into the field and is cementing its lock on the market through proprietary technology, making it a growth stock winner over the long haul.
When the company releases fiscal fourth-quarter earnings on Tuesday, it is projected to become a $2 billion sales entity. Over the next five years, the company is expected to increase earnings per share by nearly 17%, faster than Microsoft and Oracle, which are expected to deliver 7% to 9% EPS growth each year.
Our assessment of low valuation for Red Hat, which trades at 33.21 times forward price/earnings isn't based on price or earnings alone.
Three filters determine the stock's true value: return on equity should be more than 15%; the debt-to-equity ratio should be equal to or less than 0.5; and the current ratio should be closer to 2.
Red Hat meets two out of three.
The stock's 12-month trailing ROE of 15.1%, which beats the industry average of 5.3%, implies robust profitability and a competitive advantage, making it a leader in its technology niche. By comparison, creative-design software maker Adobe Systems has an ROE of 9.1, and Salesforce.com has a negative ROE.