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While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Dropbox, Inc. (NASDAQ:DBX).
Is DBX a good stock to buy now? Dropbox, Inc. (NASDAQ:DBX) was in 43 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 51. DBX shareholders have witnessed a decrease in hedge fund sentiment in recent months. There were 51 hedge funds in our database with DBX holdings at the end of June. 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 for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Ryan Tolkin, CIO of Schonfeld Strategic Advisors
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. With all of this in mind we're going to take a peek at the fresh hedge fund action surrounding Dropbox, Inc. (NASDAQ:DBX).
Do Hedge Funds Think DBX Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 43 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -16% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DBX over the last 21 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies has the most valuable position in Dropbox, Inc. (NASDAQ:DBX), worth close to $389.1 million, comprising 0.4% of its total 13F portfolio. Sitting at the No. 2 spot is SoMa Equity Partners, managed by Gil Simon, which holds a $140.1 million position; 4.5% of its 13F portfolio is allocated to the company. Remaining peers that are bullish consist of D. E. Shaw's D E Shaw, Christopher R. Hansen's Valiant Capital and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital. In terms of the portfolio weights assigned to each position Dendur Capital allocated the biggest weight to Dropbox, Inc. (NASDAQ:DBX), around 6.61% of its 13F portfolio. Greenhouse Funds is also relatively very bullish on the stock, designating 5.18 percent of its 13F equity portfolio to DBX.
Seeing as Dropbox, Inc. (NASDAQ:DBX) has faced bearish sentiment from the entirety of the hedge funds we track, we can see that there were a few hedge funds that slashed their full holdings by the end of the third quarter. Intriguingly, Steven Boyd's Armistice Capital sold off the largest stake of the "upper crust" of funds tracked by Insider Monkey, worth an estimated $35.4 million in stock. Ryan Tolkin (CIO)'s fund, Schonfeld Strategic Advisors, also said goodbye to its stock, about $10.5 million worth. These moves are interesting, as total hedge fund interest was cut by 8 funds by the end of the third quarter.
Let's check out hedge fund activity in other stocks similar to Dropbox, Inc. (NASDAQ:DBX). We will take a look at Melco Resorts & Entertainment Limited (NASDAQ:MLCO), Jazz Pharmaceuticals Plc (NASDAQ:JAZZ), Everest Re Group Ltd (NYSE:RE), Royal Gold, Inc (NASDAQ:RGLD), OneConnect Financial Technology Co., Ltd. (NYSE:OCFT), Bentley Systems, Incorporated (NASDAQ:BSY), and Nikola Corporation (NASDAQ:NKLA). All of these stocks' market caps match DBX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MLCO,34,823821,2 JAZZ,28,1259384,-6 RE,36,526484,7 RGLD,30,352094,3 OCFT,11,47483,6 BSY,19,60746,19 NKLA,17,199530,-12 Average,25,467077,2.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $467 million. That figure was $992 million in DBX's case. Everest Re Group Ltd (NYSE:RE) is the most popular stock in this table. On the other hand OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) is the least popular one with only 11 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 72.3. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 32.9% in 2020 through December 8th but still managed to beat the market by 16.2 percentage points. Hedge funds were also right about betting on DBX as the stock returned 12.1% since the end of September (through 12/8) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.