The surge in growth stocks makes sense considering our booming economy (e.g. strong GDP growth, low unemployment), but that doesn’t mean defensive income sectors (e.g. REITs, Utilities) are going out of style. Many of these companies (such as Digital Realty) continue to generate healthy income and cash flows. And from a contrarian standpoint, it’s not usually a good idea for investors to chase after what has been performing the best in the recent past (e.g. growth stocks).
3. Negative press also has plagued Digital Realty in recent months. Aside from the media pundits fawning all over growth stocks, back in September a prominent venture capitalist gave an overly negative outlook for data center REITs which drove the price lower.
Keep in mind, West Coast venture capitalists are usually more interested in finding the next unicorn (which is a different investment objective altogether) than they are in generating safe steady growing income.
4. Conflicting financials are another fear that has been plaguing DLR. Specifically, DLR has been completing a lot of investment activity that’s made its non-core FFO numbers look “lumpy” and lower than the company’s true cash generation power. The big one was on September 14, 2017 Digital Realty closed the acquisition of DuPont Fabros for about $7.9 billion. Other recent investments include land parcels in Japan and Texas, as well as an agreement to acquire 19-acre data center in Franklin Park, Illinois, for $350 million. The point is that DLR reported a net loss last quarter (Q3) and standard FFO that was lower than the same quarter a year earlier, NOT because the company is in decline, but rather because it’s been spending on attractive future growth opportunities. This is why it’s important for investors to focus on core FFO, which adjusts for non-core activities, and core FFO has been growing, and is expected to keep growing, which is a big part of the reason we like Digital Realty: More growth, a safe dividend, and an attractive price. Digital Realty is expected to announce earnings again on February 15.
1. A powerful secular trend is one of the reasons we like Digital Realty. Specifically, data centers (especially including DLR) are benefiting from a huge secular growth trend (i.e. companies are moving their data into the cloud, and the amount of data companies need to store is expected to continue increasing rapidly). Data centers will benefit from enormous growth in artificial intelligence, autonomous vehicles, the Internet of Things (IoT), and virtual reality, to name a few.