Last year’s fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards Dropbox, Inc. (NASDAQ:DBX) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.
Dropbox, Inc. (NASDAQ:DBX) was in 38 hedge funds’ portfolios at the end of September. DBX investors should be aware of a decrease in support from the world’s most elite money managers in recent months. There were 43 hedge funds in our database with DBX holdings at the end of the previous quarter. Our calculations also showed that DBX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Gil Simon of SoMa Equity Partners
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s take a look at the new hedge fund action surrounding Dropbox, Inc. (NASDAQ:DBX).
What does smart money think about Dropbox, Inc. (NASDAQ:DBX)?
Heading into the fourth quarter of 2019, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in DBX over the last 17 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Dropbox, Inc. (NASDAQ:DBX), with a stake worth $230.3 million reported as of the end of September. Trailing Renaissance Technologies was Citadel Investment Group, which amassed a stake valued at $139.2 million. SoMa Equity Partners, D E Shaw, and Southpoint Capital Advisors 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 SoMa Equity Partners allocated the biggest weight to Dropbox, Inc. (NASDAQ:DBX), around 7.13% of its 13F portfolio. Hunt Lane Capital is also relatively very bullish on the stock, earmarking 6.76 percent of its 13F equity portfolio to DBX.
Because Dropbox, Inc. (NASDAQ:DBX) has witnessed a decline in interest from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of fund managers that elected to cut their positions entirely in the third quarter. Interestingly, Anand Parekh’s Alyeska Investment Group said goodbye to the largest investment of the “upper crust” of funds tracked by Insider Monkey, totaling close to $58.5 million in stock. Brian Ashford-Russell and Tim Woolley’s fund, Polar Capital, also dropped its stock, about $43.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Dropbox, Inc. (NASDAQ:DBX) but similarly valued. These stocks are AEGON N.V. (NYSE:AEG), Grupo Aval Acciones y Valores S.A. (NYSE:AVAL), Neurocrine Biosciences, Inc. (NASDAQ:NBIX), and Carlisle Companies, Inc. (NYSE:CSL). All of these stocks’ market caps match DBX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AEG | 6 | 25903 | -3 |
| AVAL | 7 | 17609 | 0 |
| NBIX | 42 | 1101616 | 8 |
| CSL | 30 | 454941 | 5 |
| Average | 21.25 | 400017 | 2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $400 million. That figure was $978 million in DBX’s case. Neurocrine Biosciences, Inc. (NASDAQ:NBIX) is the most popular stock in this table. On the other hand AEGON N.V. (NYSE:AEG) is the least popular one with only 6 bullish hedge fund positions. Dropbox, Inc. (NASDAQ:DBX) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately DBX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DBX were disappointed as the stock returned -13% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
