In light of International Business Machines Corp. (NYSE:IBM)’s new deal, is it time to buy Box Inc (NYSE:BOX)’s beleaguered shares? In an interview on Bloomberg, Box CEO Aaron Levie and IBM SVP for Analytics Bob Picciano revealed the new partnership, which involves the integration of IBM’s Watson analytics and security services into Box’s cloud platform. The deal also gives International Business Machines Corp. (NYSE:IBM) access to Box’s services through IBM’s software products. Box Inc (NYSE:BOX) debuted on the New York Stock exchange on January 26 and has had a rough go of it since then, with the stock dropping by 24.62% from the close on its maiden trading day to yesterday’s close of $17.51 per share. This new deal, which has been ironed out over the past nine months Levie revealed, may be just the breath of fresh air that the cloud services company needs to rebound from that rough ride since its IPO. Levie tells Forbes that the deal with International Business Machines Corp. (NYSE:IBM) will help his company make headway in attracting customers from the government, financial services, and healthcare industries. These customers have a need for very secure platforms enabling analytics and big data, accessed through user-friendly systems, which is exactly what the new deal between IBM and Box aims to create.
First, a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy – which identifies the best small-cap stock picks of the best hedge fund managers – returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy, you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 142% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).
It’s a mixed bag when it comes to Box Inc (NYSE:BOX)’s fourth quarter results for its fiscal year 2015, which ended on January 31. The firm reported an impressive 61.4% growth in revenue to $62.64 million versus the same quarter a year ago, and this figure was a strong $4.65 million above consensus. It’s important to note, nonetheless, that the firm missed earnings estimates widely, despite the greater than anticipated revenue, reporting a loss of $1.65 per share for its fiscal fourth quarter, well below the consensus of a loss of $0.48 per share. For its first quarter in the company’s fiscal year 2016, the firm reported a loss of $0.39 per share, still slightly more than the estimated loss of $0.37 per share set by analysts. Revenues for the company’s first quarter of fiscal 2016, which ended April 30 were $65.6 million, a 44.8% increase against the year-ago quarter and over the $64 million expected by analysts.
Though Box Inc (NYSE:BOX) seems to be continuously growing in terms of revenue, smart money appears not to be overly enthusiastic about the company. It should be noted that there were eight hedge funds followed by Insider Monkey which reported a long position in Box Inc by the end of the first quarter. However, the relatively small investment in Box is definitely not a sign of confidence, with many other less vaunted IPOs receiving much greater investments from the smart money.
Insider Monkey follows hedge fund activity regarding companies like Box Inc (NYSE:BOX) to gauge whether the world’s best money managers see strength in these companies. Some may be of the opinion that hedge fund activity tracking may be a futile exercise, as they equate disappointing hedge fund returns in recent years to poor investment choices made by these money managers. This is not actually the case. Hedge funds have underperformed the market for several reasons which don’t actually have anything to do with stock picking, but rather with the composition of their investments. Insider activity meanwhile is just as important, as research studies have proven the efficacy of piggybacking insider purchases.
To the latter point, we see that there has yet to be any insider trading activity at Box.
Taking into account all of this, let’s see how hedge funds have been trading Box Inc (NYSE:BOX) since its January IPO.
Hedge fund activity in Box Inc (NYSE:BOX)
There were eight hedge funds tracked by Insider Monkey which reported long positions in Box Inc (NYSE:BOX) by the end of the first quarter. The total value of their collective holdings amounted to $50.76 million, a relatively small amount and in our experience, not at all a bullish signal.
When looking at the hedgies followed by Insider Monkey, Philippe Laffont‘s Coatue Management had the most valuable position in Box Inc (NYSE:BOX), worth close to $24.6 million, amounting to 0.2% of its total 13F portfolio and amounting to nearly 10% of the company’s common shares. Sitting in the number 2 spot is Brookside Capital, managed by Bain Capital, which held a $13.9 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Other hedge funds that are bullish include Balyasny Asset Management, SeaStone Capital Management, and OZ Management.
As much as Box Inc (NYSE:BOX) was beloved by angel investors, betting on the company’s shares does not seem to be a good bet at the moment, even following the partnership with IBM.