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

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In this article you are going to find out whether hedge funds think Dropbox, Inc. (NASDAQ:DBX) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Dropbox, Inc. (NASDAQ:DBX) was in 39 hedge funds' portfolios at the end of June. The all time high for this statistic is 51. DBX investors should pay attention to an increase in hedge fund sentiment lately. There were 31 hedge funds in our database with DBX holdings at the end of March. Our calculations also showed that DBX isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 79 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.

Dmitry Balyasny of Balyasny Asset Managemnet
Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we're going to take a glance at the latest hedge fund action regarding Dropbox, Inc. (NASDAQ:DBX).

Do Hedge Funds Think DBX Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 26% from the previous quarter. On the other hand, there were a total of 51 hedge funds with a bullish position in DBX a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Dropbox, Inc. (NASDAQ:DBX), with a stake worth $244.5 million reported as of the end of June. Trailing Renaissance Technologies was Two Sigma Advisors, which amassed a stake valued at $117.9 million. Elliott Investment Management, VGI Partners, and Valiant Capital 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 VGI Partners allocated the biggest weight to Dropbox, Inc. (NASDAQ:DBX), around 6.68% of its 13F portfolio. Greenhouse Funds is also relatively very bullish on the stock, setting aside 4.94 percent of its 13F equity portfolio to DBX.

As industrywide interest jumped, some big names have jumped into Dropbox, Inc. (NASDAQ:DBX) headfirst. Elliott Investment Management, managed by Paul Singer, created the most valuable position in Dropbox, Inc. (NASDAQ:DBX). Elliott Investment Management had $90.9 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also made a $10.5 million investment in the stock during the quarter. The following funds were also among the new DBX investors: Michel Massoud's Melqart Asset Management, Israel Englander's Millennium Management, and The Motley Fool's 1623 Capital.

Let's now take a look at hedge fund activity in other stocks similar to Dropbox, Inc. (NASDAQ:DBX). These stocks are Medical Properties Trust, Inc. (NYSE:MPW), Lamb Weston Holdings, Inc. (NYSE:LW), Chegg Inc (NYSE:CHGG), Trex Company, Inc. (NYSE:TREX), Grifols SA (NASDAQ:GRFS), The Toro Company (NYSE:TTC), and Newell Brands Inc. (NASDAQ:NWL). All of these stocks' market caps are similar to DBX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MPW,19,266856,-4 LW,36,692976,-2 CHGG,38,667256,5 TREX,25,206431,2 GRFS,14,283634,2 TTC,32,976252,0 NWL,25,2028252,1 Average,27,731665,0.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $732 million. That figure was $929 million in DBX's case. Chegg Inc (NYSE:CHGG) is the most popular stock in this table. On the other hand Grifols SA (NASDAQ:GRFS) is the least popular one with only 14 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 82.9. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and still beat the market by 3.1 percentage points. Unfortunately DBX wasn't nearly as popular as these 5 stocks and hedge funds that were betting on DBX were disappointed as the stock returned -8.2% since the end of the second quarter (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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