SPO Advisory Takes 5.6% Stake in Equinix Inc (EQIX)

According to a 13G recently filed with the SEC, SPO Advisory- an investment fund managed by John Scully– controls a total of nearly 2.8 million shares of Equinix Inc (NASDAQ:EQIX), a $9.1 billion market cap data center services company. In the fund’s 13F for the first quarter of 2013 (we track these quarterly filings as part of our work developing investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) we saw that SPO did not own any shares of Equinix Inc (NASDAQ:EQIX). See Scully’s stock picks from the end of March.

Equinix Inc (NASDAQ:EQIX) stands out as a company which is dependent on high earnings growth, as the valuation has been bid up on optimism regarding data centers as a business. At its current market capitalization, it trades at over 60 times its trailing earnings and at 40 times expected earnings for 2014. Its last quarterly report, however, showed net income up only 4% compared to the first quarter of 2012 as 17% revenue growth was eaten away by higher costs and interest expenses. The company has been planning to convert to a real estate investment trust (therefore becoming more tax efficient and increasing shareholder value), but recently it has been revealed that the IRS is more closely evaluating its definition of “real estate” in response to a rash of conversion attempts from companies.

The stock had been a favorite among some other fund managers during the first quarter of 2013; our database had billionaire John Paulson’s Paulson & Co. reporting a position of 2.1 million shares (find Paulson’s favorite stocks). However, the factors we’ve discussed have also gained it a sizable bearish community: according to the most recent data, 20% of the float is held short. Shorts have helped push Equinix Inc (NASDAQ:EQIX) down 14% year to date against a rising market, and we’d certainly be concerned that even if performance picks up the company is looking at a pretty high bar unless it does receive REIT status.