Was The Smart Money Right About Embracing Dropbox, Inc. (DBX)?

Asma UL Husna
·6 min read

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks aren't doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to Dropbox, Inc. (NASDAQ:DBX) changed recently.

Dropbox, Inc. (NASDAQ:DBX) investors should pay attention to an increase in hedge fund sentiment of late. Dropbox, Inc. (NASDAQ:DBX) was in 51 hedge funds' portfolios at the end of June. The all time high for this statistics is 46. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 44 hedge funds in our database with DBX positions at the end of the first quarter. Our calculations also showed that DBX isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

To most shareholders, hedge funds are assumed to be worthless, outdated investment tools of yesteryear. While there are over 8000 funds trading at the moment, Our experts look at the aristocrats of this group, approximately 850 funds. These money managers orchestrate bulk of the hedge fund industry's total asset base, and by tailing their matchless equity investments, Insider Monkey has brought to light numerous investment strategies that have historically beaten the broader indices. Insider Monkey's flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Gil Simon of SoMa Equity Partners
Gil Simon of SoMa Equity Partners

Gil Simon of SoMa Equity Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we're going to review the recent hedge fund action surrounding Dropbox, Inc. (NASDAQ:DBX).

What have hedge funds been doing with Dropbox, Inc. (NASDAQ:DBX)?

At second quarter's end, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 16% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DBX over the last 20 quarters. With the smart money's sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Dropbox, Inc. (NASDAQ:DBX), which was worth $483.8 million at the end of the third quarter. On the second spot was SoMa Equity Partners which amassed $136.6 million worth of shares. Arrowstreet Capital, D E Shaw, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Greenvale Capital allocated the biggest weight to Dropbox, Inc. (NASDAQ:DBX), around 5.36% of its 13F portfolio. SoMa Equity Partners is also relatively very bullish on the stock, earmarking 5.33 percent of its 13F equity portfolio to DBX.

As one would reasonably expect, key hedge funds were leading the bulls' herd. Greenhouse Funds, managed by Joe Milano, assembled the most valuable position in Dropbox, Inc. (NASDAQ:DBX). Greenhouse Funds had $26.5 million invested in the company at the end of the quarter. George Baxter's Sabrepoint Capital also initiated a $9.4 million position during the quarter. The following funds were also among the new DBX investors: Chuck Royce's Royce & Associates, C. Jonathan Gattman's Cloverdale Capital Management, and Anthony S. Daffer's Provenire Capital.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Dropbox, Inc. (NASDAQ:DBX) but similarly valued. We will take a look at Autohome Inc (NYSE:ATHM), Banco de Chile (NYSE:BCH), Lennox International Inc. (NYSE:LII), Centrais Elétricas Brasileiras S.A. - Eletrobrás (NYSE:EBR), The Western Union Company (NYSE:WU), Camden Property Trust (NYSE:CPT), and ICON Public Limited Company (NASDAQ:ICLR). This group of stocks' market values are closest to DBX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATHM,24,820669,9 BCH,3,38541,-1 LII,24,258111,3 EBR,8,10334,3 WU,34,622814,0 CPT,26,336306,-6 ICLR,24,590357,3 Average,20.4,382447,1.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.4 hedge funds with bullish positions and the average amount invested in these stocks was $382 million. That figure was $1326 million in DBX's case. The Western Union Company (NYSE:WU) is the most popular stock in this table. On the other hand Banco de Chile (NYSE:BCH) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Dropbox, Inc. (NASDAQ:DBX) is more popular among hedge funds. Our overall hedge fund sentiment score for DBX is 90. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Unfortunately DBX wasn't nearly as popular as these 10 stocks and hedge funds that were betting on DBX were disappointed as the stock returned -9.4% since the end of the second quarter (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.

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