Option Trade 
Red Hat Inc (NYSE:RHT) Calls
Wednesday, June 14, 2017

** OPTION TRADE: Buy the RHT SEPT 15 2017 92.500 CALL at approximately $3.50. Place a pre-determined sell at $7.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.40.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

A player in the Technology space, Red Hat Inc. (NYSE:RHT), a global provider of open source software solutions, using a community-powered approach to develop and offer operating system, middleware, virtualization, storage and cloud technologies, will release earnings on June, 28. Analysts forecast EPS of $0.34, down exactly $0.01 or 2.86 % from 2014’s $0.35 EPS.

The expected RHT’s profit could reach $60.36 million giving the stock 65.24 P/E in the case that $0.34 earnings per share is reported.

Red Hat has a broad portfolio of trusted and affordable open source operating system applications, including physical, virtual, private and public cloud products. Red Hat utilizes a subscription-based revenue structure. They currently operate in over 35 countries, and are headquartered in Raleigh, North Carolina.

For RHT, the company currently has $1.09 Billion of cash on the books. You can get a sense of how sustainable that is by a levered free cash flow of $702.82 Million over the past twelve months. Generally speaking, earnings are expected to grow in coming quarters. Analysts are forecasting earnings of $0.34 on a per share basis this quarter. Perhaps, that suggests something about why 73.98% of the outstanding share supply is held by institutional investors.

Linux and open-source software vendor Red Hat is more than just a likely source of double-digit returns in 2017. It's a strong candidate to deliver steady returns, including a large number of double-digit jumps.

And Red Hat shares have been delivering exactly that for a while.

The average annual return on Red Hat shares over the last five years was 10.7%. That's actually the lowest five-year compound annual growth rate (CAGR) of the last seven years. On several occasions, Red Hat investors have enjoyed CAGR returns of 20% or more.

The company runs a lightweight, disruptive business model with a sharp focus on high-growth markets. Red Hat Enterprise Linux is already a big name in enterprise computing circles. Going forward, Red Hat is establishing itself as a leader in the emerging OpenStack market while also providing top-notch security solutions for the Internet of Things.

Red Hat has a market capitalization of $15.87 billion, a P/E ratio of 64.23 and a beta of 1.30. The stock has a 50 day moving average price of $88.78 and a 200-day moving average price of $82.08. Red Hat has a 1-year low of $68.54 and a 1-year high of $92.49.

Influencing Factors to Consider

In recent action, Red Hat, Inc. has made a move of +3.54% over the past month, which has come on weak relative transaction volume. Over the trailing year, the stock is outperforming the S&P 500 by 1.85, and it’s gotten there by action that has been more volatile on a day-to-day basis than most other stocks on the exchange.

OpenStack is an open source cloud operating system that allows businesses to develop their own solutions for any operating needs, resulting in a lean, efficient, and effective private enterprise solution. At the very core of the cloud segment, is its foundation of the Linux software. Red Hat Enterprise Linux (RHEL), while continuing to grow in the mid-teens, will tremendously help to grow another segment of Red Hat's business as they develop and grow their open source cloud software, Red Hat OpenStack. RHEL makes up nearly 67% of the $2 billion Linux market, which will allow them to cross-sell Red Hat OpenStack to new and continuing clients as the shift to the hybrid cloud grows. Red Hat has been actively marketing and selling their emerging cloud technologies, with this segment of their business growing at over a 35% CAGR. The transition to the cloud by companies all around the world will make up an addressable market of $5 billion for OpenStack, and it is believed that Red Hat is in a position to take control of this market by leveraging their successful Linux operating system.

Deal growth reflects Red Hat's ability to cross-sell products to current customers seeking the on-premise and cloud open source hybrid for their operations. During 3Q 2017, RHT saw their top 25 largest deals renew at a higher price of 120% of their initial value. Also notable, 93% of the top 100, and 84% of the top 1,000, customers are using more than one of Red Hat's technologies. These rates will continue to grow as Red Hat cross-sells Red Hat OpenStack and attempts to capture the $5 billion addressable market. The number of customers that have more than one product will grow with the cloud, and so will overall revenues.

Large deals have continued to be a growing factor for revenues, with deals that exceed $1 million growing at a CAGR of 31% since 2012. The large deal growth with only accelerate with the adoption of OpenStack.

Open Source is expected to succeed with cloud technology because, unlike proprietary operating servers (ex. Windows), each individual developer and company can shape innovated and time-saving systems directly effective for their business.

Analysts and Hedge Funds Opinions

Sanford C. Bernstein started coverage on shares of Red Hat, Inc. in a research report issued on Wednesday, May 24th. The firm set a “market perform” rating and a $102.00 price target on the open-source software company’s stock. Sanford C. Bernstein’s price target indicates a potential upside of 14.25% from the company’s previous close.

Also, several other equities analysts have recently commented on the company…..

  • Drexel Hamilton reaffirmed a “buy” rating and issued a $105.00 price target on shares of Red Hat in a report on Friday, March 24th.
  • Cowen and Company upped their price target on Red Hat from $88.00 to $93.00 and gave the company an “outperform” rating in a report on Tuesday, March 28th.
  • BTIG Research boosted their target price on shares of Red Hat from $90.00 to $95.00 and gave the company a “buy” rating in a research note on Tuesday, March 28th.
  • William Blair reissued an “outperform” rating on shares of Red Hat in a research note on Wednesday, March 22nd.
  • Finally, BMO Capital Markets upped their price target on shares of Red Hat from $75.00 to $90.00 and gave the stock a “market perform” rating in a research note on Tuesday, March 28th.

Red Hat, Inc. has a consensus outperform rating from 28 Wall Street analysts, and the number of shares currently sold short amount to at least 2.46% of shares outstanding. The stock is up 27.47 this year. Wall Street is only getting more bullish on the stock, with 19 of analysts who cover RHT having a buy-equivalent rating. Analysts have placed a $95.20 price target on Red Hat, Inc., suggesting a 7.15% gain from recent close. It’s currently trading about -3.93% below its 52-week high.

Several institutional investors have recently made changes to their positions in the stock…..

  • FMR LLC raised its position in Red Hat, Inc. by 3.3% during the first quarter, according to its most recent Form 13F filing with the Securities and Exchange Commission (SEC). The firm owned 10,079,689 shares of the open-source software company’s stock after buying an additional 317,464 shares during the period. FMR LLC owned 5.67% of Red Hat worth $871,894,000 as of its most recent filing with the SEC.
  • Bronfman E.L. Rothschild L.P. boosted its position in Red Hat by 1.4% in the first quarter. Bronfman E.L. Rothschild L.P. now owns 1,521 shares of the open-source software company’s stock valued at $132,000 after buying an additional 21 shares during the last quarter.
  • Mason Street Advisors LLC boosted its position in Red Hat by 0.3% in the first quarter. Mason Street Advisors LLC now owns 24,638 shares of the open-source software company’s stock valued at $2,131,000 after buying an additional 70 shares during the last quarter.
  • ETRADE Capital Management LLC raised its stake in shares of Red Hat by 71.7% in the third quarter. ETRADE Capital Management LLC now owns 7,047 shares of the open-source software company’s stock valued at $570,000 after buying an additional 2,942 shares during the last quarter.

Harvey’s Options Volatility Indicator


Looking ahead, there is no reason why Red Hat's rock-steady returns should slow down anytime soon.

Red Hat's top-line sales growth is accelerating while earnings have skyrocketed in recent quarters. Share prices have seen solid gains.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the RHT SEPT 15 2017 92.500 CALL at approximately $3.50. Place a pre-determined sell at $7.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.40.


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