Why Digital Realty Trust's Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of data center facilities manager Digital Realty Trust (NYSE: DLR  ) plunged 15.27% today after the company missed analysts' expectations for third-quarter earnings per share, and lowered guidance for the full year.

So what: Prior to today, Digital Realty Trust's shares had already lost nearly 16% year to date, badly lagging the broad market in the process. In a report published today, Raymond James slashed the shares' rating from strong buy, to market perform, concluding that "the risks that come with owning DLR shares today seem to more than offset any near-term upside."

Now what: Reuters reported today that hedge fund Highfields Capital has had a good run shorting Digital Realty's shares (i.e. betting on a decline in the price) less than six months after presenting its "short" thesis at the Ira Sohn Investment Conference in May.

At the time, Highfields Chief Executive Jonathon Jacobson said the shares could drop as low as $19 per share, citing increasing competition from Amazon, Google, and Microsoft, which all maintain vast server farms. Jacobson also said the $0.78 per-share quarterly dividend -- which the company maintained for a December payout -- is unsustainable. Highfields is a smart player, and the recent stock price performance appears to confirm their view -- investors will want to do their own careful due diligence before taking the other side of their short trade.

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