The shares of Red Hat, Inc. have increased by more than 44.05% this year alone. The shares recently went up by 1.63% or $2.78 and now trades at $173.01. The shares of Lumentum Holdings Inc. (NASDAQ:LITE), has jumped by 22.60% year to date as of 06/12/2018. The shares currently trade at $59.95 and have been able to report a change of -1.40% over the past one week.
The stock of Red Hat, Inc. and Lumentum Holdings Inc. were two of the most active stocks on Tuesday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.Next 5Y EPS Growth: 18.02% versus 18.50%
When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that RHT will grow it’s earning at a 18.02% annual rate in the next 5 years. This is in contrast to LITE which will have a positive growth at a 18.50% annual rate. This means that the higher growth rate of LITE implies a greater potential for capital appreciation over the years.Profitability and Returns
Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. RHT has an EBITDA margin of 21.19%, this implies that the underlying business of RHT is more profitable. The ROI of RHT is 17.00% while that of LITE is 0.50%. These figures suggest that RHT ventures generate a higher ROI than that of LITE.Cash Flow
The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, RHT’s free cash flow per share is a positive 11.87, while that of LITE is positive 7.12.Liquidity and Financial Risk
The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for RHT is 1.40 and that of LITE is 5.60. This implies that it is easier for RHT to cover its immediate obligations over the next 12 months than LITE. The debt ratio of RHT is 0.52 compared to 0.39 for LITE. RHT can be able to settle its long-term debts and thus is a lower financial risk than LITE.Valuation
RHT currently trades at a forward P/E of 42.90, a P/B of 20.84, and a P/S of 10.61 while LITE trades at a forward P/E of 12.92, a P/B of 4.27, and a P/S of 3.34. This means that looking at the earnings, book values and sales basis, LITE is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.Analyst Price Targets and Opinions
The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of RHT is currently at a 2.02% to its one-year price target of 169.58. Looking at its rival pricing, LITE is at a -27.42% relative to its price target of 82.60.
When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), RHT is given a 2.20 while 1.90 placed for LITE. This means that analysts are more bullish on the outlook for RHT stocks.Insider Activity and Investor Sentiment
Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for RHT is 3.19 while that of LITE is just 4.66. This means that analysts are more bullish on the forecast for RHT stock.
The stock of Red Hat, Inc. defeats that of Lumentum Holdings Inc. when the two are compared, with RHT taking 5 out of the total factors that were been considered. RHT happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, RHT is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for RHT is better on when it is viewed on short interest.