Red Hat Stock Could Hit Record Highs Next Week

RHT reports earnings after the close Monday

Managing Editor
Mar 23, 2018 at 12:15 PM
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Shares of Red Hat Inc (NYSE:RHT) are up 0.8% to trade at $152.20, after BMO raised its price target on the software stock to $172 from $142. This was the fifth price-target hike issued to RHT stock this week, and following this flurry of brokerage attention, Red Hat is slated to report fourth-quarter earnings after the close on Monday.

Historically speaking, RHT stock has had a positive earnings reaction in three of the last four quarters, including a 5.2% bump last March. Over the last eight quarters, the equity has averaged a 6% move the day after earnings, regardless of direction. This time around, the options market is pricing in a larger-than-usual 8.4% one-day move, per Trade-Alert. A move of similar magnitude to the upside would put RHT stock at around the $165 level, a new record high, based on current trading levels. 

Looking closer at the charts, RHT stock has added 26% in 2018 and scored an all-time peak of $157.22 on March 7. Since then, the shares have consolidated atop their 20-day moving average, a trendline that has served as support for most of the past 12 months.

Despite the stock's long-term technical strength, there is still a bearish bias on Wall Street. For instance, nearly 35% of covering analysts still recommend either a "hold" or "sell" rating. Furthermore, RHT's average 12-month price target of $142.93 sits at a discount to the stock's current perch. Another positive earnings reaction could prompt a round of upgrades and/or more price-target hikes.

Short sellers have been piling on the stock, too, with short interest up more than 76% since early November. Not only is it impressive that the equity has rallied in the face of such intense selling pressure, but, at RHT's average daily trading volume, it would take it would take nearly four days to buy back those bearish bets.

Near-term options traders are more put-heavy than usual as well. This is according to Red Hat's Schaeffer's put/call open interest ratio (SOIR) of 1.12 that ranks in the 92nd percentile of its annual range. This indicates that there is heavier-than-normal amount of short-term puts open relative to calls. A capitulation from some of the weaker bearish hands could create tailwinds for RHT stock.

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