In the world of information technology, two megatrends are in their infancy — migration to cloud computing and virtualization.

Cloud computing entails providing software as a service.

Virtualization means the creation of virtual machines that mimic real computers.

Cloud computing and virtualization stocks are very expensive, face stiff competition and are subject to rapid technological changes. This poses a challenge for investors focused on risk adjusted returns.

Red Hat  RHT  is a hidden gem. The company provides open-source infrastructure software to the enterprises migrating to the two megatrends. Red Hat is the equivalent of a seller of picks and pans to the miners during the California gold rush. Our long-term estimates of growth rate and earnings power are significantly higher than the consensus estimates. The company is also an attractive acquisition target.

Red Hat is all about the change that is taking place; therefore it makes sense to analyze it in the context of the ZYX Change Method. The premise behind the ZYX Change Method is that the most money with the lowest risk is made by identifying change early. Here is how Red Hat measures up to our six screens.

Change screen

Cloud computing and virtualization have already become unstoppable. Most major corporations are enthusiastically embracing these two trends because of significant cost savings. Cloud computing, if done correctly, also provides a strategic advantage. Even the entities that are not enthusiastic are being dragged into these two trends kicking and screaming. This screen is highly supportive of taking a position in Red Hat.

Fund-flow screen

Our algorithms show that significant funds have been flowing into Red Hat, and we have detected heavy buying by the Smart Money every time this stock has pulled back over the last year. At present, our Smart Money indicator is neutral. Our interpretation is that as the stock pulls back, the Smart Money is likely to start buying this stock again…Read more at MarketWatch