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These 2 Stocks Fell on Their Faces This Week

By Eric Volkman - Nov 1, 2019 at 9:52PM

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The final trading days of October were not kind to Tesla or Digital Realty Trust.

For the stock market, the final week of October wasn't particularly one to remember. That's not so surprising, as this can often be a relatively quiet period for top stocks ahead of the shopping frenzy of Black Friday and the subsequent rush of the holiday period.

Most indexes this week ended up moving largely sideways, hitting a few dips and spikes on the way. Here's a look at two companies that ended more on the down side -- both traded down by around 4.5% over the five-day trading period. Perhaps we should consider buying one or both at their weakened prices.

A Tesla Roadster in motion.

The Tesla Roadster. Image source: Tesla.


Tesla (TSLA -0.32%) is one of those stocks that always seems to get hit with bad news following a positive development or two. The most recent ding for the company was Friday's news that the National Highway Traffic Safety Administration (NHTSA) has launched a probe into battery fires that have erupted in Tesla's cars. Over the course of the week, Tesla stock declined by nearly 5%.

The investigation is the latest uncomfortable reminder that the company has safety issues more often than some think it should. Tesla's rather misleadingly named Autopilot feature has apparently been responsible for several fatal accidents, while the company has faced criticism that its safety claims are exaggerated.

The timing of the NHTSA's announcement wasn't fortuitous. It came barely a week after Tesla triumphantly announced its Q3 results, with headline numbers that positively crushed analyst estimates. It even featured that rarest of all occurrences for the company: a bottom-line profit.

I don't think the investigation into the battery fires changes the game much for Tesla stock. It's hardly the first time that the company's safety issues have hit the headlines, after all. And many of its believers and shareholders seem convinced that the cars are at least as safe as those made by rivals.

So investors shouldn't trade in or out of this stock based solely on this news. Personally, my opinion on Tesla hasn't changed -- I feel it's still a bit of a niche manufacturer in an industry where scale matters, and its management makes questionable decisions. I'm not bullish on the company as an investment.

Digital Realty Trust

Data center real estate investment trust (REIT) Digital Realty Trust (DLR -1.12%) is feeling the urge to merge. Concurrent with its release of Q3 of fiscal 2019 results, the company said it has agreed to merge with European counterpart Interxion Holding (INXN).

Effectively, Digital Realty is buying Interxion in an all-stock deal that values the latter at roughly $93.48 per share. This is only 4.5% above that stock's closing price on the day before the deal was announced. It also puts key Interxion valuations at around the same level as those of Digital Realty. 

What Digital Realty stands to get for its stock is the second-largest data center business in Europe. Although that continent is nowhere near the size of the U.S., it's still a significant and high-potential region in the face of demand for ever-heavier data use.

This means that the price agreed in the deal is basically a bargain -- and this could actually be a problem. Market speculation has it that Interxion shareholders might not like being sold at that level, and vote against the deal in the hopes of getting more dosh (either from a rival suitor or from Digital Realty). 

This fear seems to have impacted Digital Realty stock more than those aforementioned quarterly results, which were good, if not great. Revenue rose by almost 5% on a year-over-year basis to $806 million. This didn't meet analyst expectations of $813 million, but wasn't worryingly far below.

In terms of profitability, "core" (i.e., adjusted) funds from operations (FFO, the most important profitability line item for REITs) came in at $1.67 per share. That topped the average prognosticator projection by around $0.04.

I like the Interxion buy, as it's a smart and opportunistic move that makes Digital Realty a major player in the European market. Yes, Interxion shareholders might effectively agitate for a higher price -- and perhaps even initiate some kind of bidding war -- but since Digital Realty has made its offer exclusively in stock, it likely has room to add more to its offer.

I think Digital Realty will be successful in its courtship of the European company, which will make it even more of a commanding presence in the global data center space. I wouldn't be concerned about the slip in share price or the potential resistance to its current Interxion bid. Digital Realty is a solid operator, in my view, and its stock is a buy.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
$734.76 (-0.32%) $-2.36
Digital Realty Trust, Inc. Stock Quote
Digital Realty Trust, Inc.
$137.25 (-1.12%) $-1.55
InterXion Holding N.V. Stock Quote
InterXion Holding N.V.

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