Jonathan Jacobson pitched short in Digital Realty Trust, Inc. (NYSE:DLR) at the Ira Sohn Conference held in New York in May this year. While explaining his thesis, Jacobson mentioned the increasing competition that DLR faces from Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT), which the company seemed incapable of handling.
Highfields’ short in Digital Realty, AT&T paying off
As it turns out, the short in Digital Realty should be a major contributor to profits in the third quarter. Shares of the REIT were down 13% in the last quarter alone and have so far given back 29% of their gains year to date. Jacobson said that the fair value of DLR is $20, the company trades around $48 these days. Highfields Capital’s public portfolio shows that the fund holds 1 million put options in the company.
In response to Jacobson’s call to short Digital Realty, Citi analysts defended the company. Citi issued a report saying that the company has invested capital in growth opportunities. The analysts also said that the reason for the company’s volatile capex is its operations in several modes of real estate.
Jacobson said that Digital Realty Trust, Inc. (NYSE:DLR) has an unsustainable cost structure where capex keeps rising every quarter, adding that Digital Realty Trust, Inc. (NYSE:DLR) cannot continue to pay dividends. Hedging its bets, Highfields Capital also bought a position in Microsoft Corporation (NASDAQ:MSFT) in Q2, and the shares of the company are up 32% since the start of April. However, the fund sold its position in Google in the second quarter.
In the Ira Sohn conference, Jacobson also said that investors should beware of AT&T Inc. (NYSE:T) and Linn Energy LLC (NYSE:LNN). Linn Energy is so far down 12% for the year whereas AT&T is up 5 % for the year. Believing the price will go down, Highfields Capital bought 5 million put options of AT&T in the second quarter. Between the start of second quarter to date, AT&T shares are down 3.5%, so Jacobson is not doing so bad on this one.
Highfields Capital doing well in long book
Highfields Capital has churned out a decent return through the year so far. As per Reuters the fund is up 18% through the three quarters. This matches with the +18% return on the S&P 500 index over the same period.
In the third quarter letter, Jacobson said that the funds will return 5-15% of its assets under management to clients as it is having difficulty in finding attractive opportunities to invest in.
There are more Jacobson picks that have done well. Highfields’ top position is a leveraged stake in SPDR Gold Trust (ETF) (NYSEARCA:GLD) where the fund owns 7.28 million call options. Canadian Natural Resource Ltd (NYSE:CNQ) (TSE:CNQ) is the fund’s second largest stake, and has gained a decent 8.6% through the year.
Jacobson’s best pick has been SLM Corp (NASDAQ:SLM), where the hedge fund owns 25.23 million shares, as of the 13 filing for Q2. Shares of SLM Corp are up 46% YTD. One of Highfields’ top holdings has been taken off the market, Dell Inc. (NASDAQ:DELL) was bought by SilverLake Management LLC.
The fund also has a position in McGraw Hill Financial Inc (NYSE:MHFI) which is up 29% through the year so far. Stake in DIRECTV (NASDAQ:DTV), where Highfields Capital owns 7.58 million shares, is also up 28% for the year.
Stay tuned for more, Highfields will be filing 13f for Q3 in a week.