Digital Realty Trust, Inc. (DLR) Fell Out Of Favor With Hedge Funds

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Digital Realty Trust, Inc. (NYSE:DLR) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Digital Realty Trust, Inc. (NYSE:DLR) has seen a decrease in support from the world’s most elite money managers in recent months. Digital Realty Trust, Inc. (NYSE:DLR) was in 26 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 34. There were 29 hedge funds in our database with DLR holdings at the end of March. Our calculations also showed that DLR isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s go over the latest hedge fund action encompassing Digital Realty Trust, Inc. (NYSE:DLR).

What does smart money think about Digital Realty Trust, Inc. (NYSE:DLR)?

At Q2’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. On the other hand, there were a total of 18 hedge funds with a bullish position in DLR a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Jasper Ridge Partners held the most valuable stake in Digital Realty Trust, Inc. (NYSE:DLR), which was worth $92.7 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $44 million worth of shares. AQR Capital Management, Zimmer Partners, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Jasper Ridge Partners allocated the biggest weight to Digital Realty Trust, Inc. (NYSE:DLR), around 6.08% of its 13F portfolio. Waterfront Capital Partners is also relatively very bullish on the stock, setting aside 2.29 percent of its 13F equity portfolio to DLR.

Because Digital Realty Trust, Inc. (NYSE:DLR) has experienced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few fund managers who sold off their entire stakes in the second quarter. Intriguingly, Renaissance Technologies said goodbye to the largest position of the “upper crust” of funds tracked by Insider Monkey, valued at about $40.9 million in stock, and John Osterweis’s Osterweis Capital Management was right behind this move, as the fund sold off about $40.9 million worth. These moves are interesting, as aggregate hedge fund interest fell by 3 funds in the second quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Digital Realty Trust, Inc. (NYSE:DLR) but similarly valued. These stocks are Electronic Arts Inc. (NASDAQ:EA), BCE Inc. (NYSE:BCE), General Mills, Inc. (NYSE:GIS), Walgreens Boots Alliance Inc (NASDAQ:WBA), Emerson Electric Co. (NYSE:EMR), eBay Inc (NASDAQ:EBAY), and Centene Corporation (NYSE:CNC). This group of stocks’ market caps are closest to DLR’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 46.3 hedge funds with bullish positions and the average amount invested in these stocks was $1727 million. That figure was $274 million in DLR’s case. Centene Corporation (NYSE:CNC) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 10 bullish hedge fund positions. Digital Realty Trust, Inc. (NYSE:DLR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DLR is 38.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately DLR wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); DLR investors were disappointed as the stock returned 0.7% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

Disclosure: None. This article was originally published at Insider Monkey.