Is Digital Realty Trust, Inc. (DLR) Worthy of Your Portfolio?

The successful funds run by legendary investors such as Dan Loeb and David Tepper make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don’t follow. Because of their pay structures, they have strong incentive to do the research necessary to beat the market. That’s why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at Digital Realty Trust, Inc. (NYSE:DLR) from the perspective of those successful funds.

Digital Realty Trust, Inc. (NYSE:DLR) investors should pay attention to a decrease in hedge fund interest of late. DLR was in 16 hedge funds’ portfolios at the end of September. By comparison, there had been 18 funds in our database with DLR holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as DaVita HealthCare Partners Inc (NYSE:DVA), Goldcorp Inc. (USA) (NYSE:GG), and CenturyLink, Inc. (NYSE:CTL) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

Keeping this in mind, let’s view the new action surrounding Digital Realty Trust, Inc. (NYSE:DLR).

What have hedge funds been doing with Digital Realty Trust, Inc. (NYSE:DLR)?

At the end of the third quarter, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on Digital Realty Trust, Inc. (NYSE:DLR), down by 11% over the quarter. By comparison, 20 hedge funds held shares or bullish call options in DLR heading into this year. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Israel Englander’s Millennium Management has the most valuable position in Digital Realty Trust, Inc. (NYSE:DLR), worth close to $31.4 million. On Millennium Management’s heels is Jim Simons’ Renaissance Technologies, which holds a $24.8 million position. Remaining hedge funds and institutional investors that hold long positions contain Phill Gross and Robert Atchinson’s Adage Capital Management, Ken Griffin’s Citadel Investment Group, and Louis Navellier’s Navellier & Associates. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Because Digital Realty Trust, Inc. (NYSE:DLR) has witnessed falling interest from the entirety of the hedge funds we track, logic holds that there exists a select few money managers who sold off their full holdings heading into fourth quarter. At the top of the heap, Stuart J. Zimmer’s Zimmer Partners dropped the biggest position of all the investors monitored by Insider Monkey, valued at an estimated $16.3 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund sold off about $5.9 million worth of shares.

Let’s also examine hedge fund activity in other stocks similar to Digital Realty Trust, Inc. (NYSE:DLR). We will take a look at DaVita HealthCare Partners Inc (NYSE:DVA), Goldcorp Inc. (USA) (NYSE:GG), CenturyLink, Inc. (NYSE:CTL), and Expedia Inc (NASDAQ:EXPE). All of these stocks’ market caps match DLR’s market cap.

As you can see these stocks had an average of 38 investors with bullish positions and the average amount invested in these stocks was $2.22 billion. That figure was $175 million in DLR’s case. Expedia Inc (NASDAQ:EXPE) is the most popular stock in this table and Goldcorp Inc. (USA) (NYSE:GG) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Digital Realty Trust, Inc. (NYSE:DLR) is even less popular than Goldcorp Inc. (USA) (NYSE:GG). Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None