Technology

Why One Red-Hot Sector Keeps Going Higher Even as Yields Plunge

Lee Jackson

Published: June 11, 2019 6:30 am

Last Updated: January 30, 2020 7:49 pm

If you had asked investors back in the 1990s what sector would be the hottest in 25 years, many would have said the tower sector, as cell phone usage would skyrocket, and they would have been correct. However, the sector that many were not even aware of then that has blown by the tower stocks is the data center real estate investment trusts (REITs). Demand for everything streaming, cloud computing, storage and so much more grows sequentially every year, and that demand is not slowing down any time soon.

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In a new research report, Deutsche Bank continues to love the data centers, especially over the tower REITs, on a growth-adjusted basis. Plus, in a low interest rate era, the stocks also provide investors with serious total return potential. The analysts noted this:

We continue to expect high-single / low-double-digit compound annual growth rates in adjusted funds from operations per share from the group, underpinned by hyperscale expansion and enterprise centric hybrid collocated deployments. This, amidst a backdrop of lower interest rates and increasing demand for Communications Infrastructure REITs, bodes favorably for Data Centers.

The firm has three data center stocks rated Buy, and all make sense from growth portfolios that like an income kicker.

CyrusOne

This is a smaller capitalization top pick among the data center stocks. CyrusOne Inc. (NASDAQ: CONE) designs, builds and operates facilities across the United States, Europe and Asia that give its customers the flexibility and scale to match their specific growth needs.

Specializing in highly reliable enterprise-class, carrier-neutral data center properties, the company provides robust data center infrastructure to ensure the continued operation of IT equipment for a rapidly growing list of organizations that now nears 900, including nine of the Fortune 20 and more than 160 of the Fortune 1000 or equivalent-sized companies.

The Deutsche Bank analysts feel that some of the best returns in the data center sector may be found in the smaller players in the space like CyrusOne. The company has traded at numerous lower multiples than some of its bigger competition, and other top analysts also feel that the discount valuation is not warranted given the recent surge in leasing and above-average growth. The company also has exhibited faster deployment times, rapid new market expansion and low churn among customers, all bullish reasons for buying the stock.

Unitholders are paid a solid 3.07% distribution. The Deutsche Bank price objective is $70, while the Wall Street consensus target price is $64.50. CyrusOne closed Monday at $59.69.

Digital Realty Trust

This top data center company also is a solid play on the huge cloud and streaming content revolution. Digital Realty Trust Inc. (NYSE: DLR) supports the data center and colocation strategies of more than 600 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia.

Digital Realty’s clients include domestic and international companies of all sizes, ranging from financial services and cloud and information technology services to manufacturing, energy, gaming, life sciences and consumer products. The company rates highest with portfolio managers, given that 8.39% of the market cap of the company is in institutional hands.

Analysts cite the solid dividend and the potential for dividend growth. They also feel that data center pricing is still favorable, and the growth in adoption of the cloud is a positive going forward. Lastly, they believe the stock is underweighted by active managers and could see an uptick if they started adding shares.

Digital Realty investors are paid a very solid 3.67% distribution. The Deutsche Bank price target is $125. The consensus price target is $126.19, and it was last seen trading at $116.83.

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Equinix

This is one of the larger capitalization data center companies, as well as a top play for more conservative accounts. Equinix Inc. (NASDAQ: EQIX) provides data center services to protect and connect the information assets for the enterprises, financial services companies, and content and network providers primarily in the Americas, Europe, the Middle East, Africa and the Asia-Pacific.

The company provides colocation services and related offerings, including operations space, storage space, cabinets and power for customers colocation needs; interconnection services, comprising physical cross connect/direct interconnections, Equinix Internet Exchange, Equinix Cloud Exchange, Equinix Metro Connect and Internet connectivity services; and managed IT infrastructure services, including installation of customer equipment and cabling, as well as equipment rebooting and power cycling, card swapping and emergency equipment replacement services.

Investors receive a 1.95% distribution. The $500 Deutsche Bank target price is less than the $514.87 consensus price objective. Equinix closed at $506.02 on Monday.

These top companies are very solid total return plays in an industry that sees no signs of slowing down. In addition, they all have backed up big from highs printed earlier this year and are offering better entry points.