Were Hedge Funds Right About Piling Into Dropbox, Inc. (DBX)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Dropbox, Inc. (NASDAQ:DBX) and determine whether the smart money was really smart about this stock.

Is Dropbox, Inc. (NASDAQ:DBX) worth your attention right now? Investors who are in the know were in a bearish mood. The number of long hedge fund positions shrunk by 2 recently. Our calculations also showed that DBX isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). DBX was in 44 hedge funds’ portfolios at the end of the first quarter of 2020. There were 46 hedge funds in our database with DBX positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Chris Hansen - Valiant Capital

Chris Hansen of Valiant Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to analyze the new hedge fund action regarding Dropbox, Inc. (NASDAQ:DBX).

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

At the end of the first quarter, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DBX over the last 18 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.

The largest stake in Dropbox, Inc. (NASDAQ:DBX) was held by Renaissance Technologies, which reported holding $347.5 million worth of stock at the end of September. It was followed by SoMa Equity Partners with a $108.6 million position. Other investors bullish on the company included D E Shaw, Greenvale Capital, and Valiant Capital. In terms of the portfolio weights assigned to each position Greenvale Capital allocated the biggest weight to Dropbox, Inc. (NASDAQ:DBX), around 17.57% of its 13F portfolio. SoMa Equity Partners is also relatively very bullish on the stock, setting aside 6.1 percent of its 13F equity portfolio to DBX.

Judging by the fact that Dropbox, Inc. (NASDAQ:DBX) has faced declining sentiment from the smart money, it’s easy to see that there exists a select few hedgies who were dropping their positions entirely heading into Q4. Intriguingly, Bobby Yazdani and Babak Poushanchi’s Cota Capital dropped the largest stake of the “upper crust” of funds watched by Insider Monkey, valued at an estimated $10.5 million in stock. Sander Gerber’s fund, Hudson Bay Capital Management, also sold off its stock, about $7.9 million worth. These transactions are important to note, as total hedge fund interest dropped by 2 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Dropbox, Inc. (NASDAQ:DBX). We will take a look at CNH Industrial NV (NYSE:CNHI), The Carlyle Group Inc. (NASDAQ:CG), Zillow Group Inc (NASDAQ:Z), and Clarivate Plc (NYSE:CCC). All of these stocks’ market caps are similar to DBX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CNHI 17 156917 1
CG 16 232286 3
Z 37 1368913 0
CCC 28 818151 -17
Average 24.5 644067 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $644 million. That figure was $985 million in DBX’s case. Zillow Group Inc (NASDAQ:Z) is the most popular stock in this table. On the other hand The Carlyle Group Inc. (NASDAQ:CG) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Dropbox, Inc. (NASDAQ:DBX) is more popular among hedge funds. 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on DBX, though not to the same extent, as the stock returned 20.3% in Q2 and outperformed the market as well.

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