Did Hedge Funds Get Dropbox, Inc. (DBX) Right?

Stocks, especially the once high flying technology stocks, had a lousy start to the new year. QQQ lost 9% of its value in January. We aren’t certain about the bubbly technology stocks that trade for ridiculously high multiples of their revenues, but we believe top hedge fund stocks will deliver positive returns for the rest of the year. In this article, we will take a closer look at hedge fund sentiment towards Dropbox, Inc. (NASDAQ:DBX) at the end of the third quarter and determine whether the smart money was really smart about this stock.

Is Dropbox, Inc. (NASDAQ:DBX) a buy here? The smart money was getting more optimistic. The number of bullish hedge fund bets improved by 2 recently. Dropbox, Inc. (NASDAQ:DBX) was in 41 hedge funds’ portfolios at the end of the third quarter of 2021. The all time high for this statistic is 51. Our calculations also showed that DBX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

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 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. With all of this in mind we’re going to view the key hedge fund action regarding Dropbox, Inc. (NASDAQ:DBX).

Seth Klarman of Baupost Group

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

At third quarter’s end, a total of 41 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from the second quarter of 2021. On the other hand, there were a total of 43 hedge funds with a bullish position in DBX a year ago. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Dropbox, Inc. (NASDAQ:DBX), with a stake worth $280.3 million reported as of the end of September. Trailing Renaissance Technologies was Baupost Group, which amassed a stake valued at $271.4 million. Two Sigma Advisors, Greenhouse Funds, and Citadel Investment Group 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 Greenhouse Funds allocated the biggest weight to Dropbox, Inc. (NASDAQ:DBX), around 6.64% of its 13F portfolio. Valiant Capital is also relatively very bullish on the stock, setting aside 4.2 percent of its 13F equity portfolio to DBX.

Consequently, key hedge funds have jumped into Dropbox, Inc. (NASDAQ:DBX) headfirst. Baupost Group, managed by Seth Klarman, created the most outsized position in Dropbox, Inc. (NASDAQ:DBX). Baupost Group had $271.4 million invested in the company at the end of the quarter. Thomas Bailard’s Bailard Inc also made a $4.5 million investment in the stock during the quarter. The other funds with brand new DBX positions are Michael Gelband’s ExodusPoint Capital, Qing Li’s Sciencast Management, and David Costen Haley’s HBK Investments.

Let’s go over hedge fund activity in other stocks similar to Dropbox, Inc. (NASDAQ:DBX). We will take a look at Globant SA (NYSE:GLOB), Atmos Energy Corporation (NYSE:ATO), Bunge Limited (NYSE:BG), Universal Health Services, Inc. (NYSE:UHS), Axon Enterprise, Inc. (NASDAQ:AXON), Lamar Advertising Company (NASDAQ:LAMR), and Natura &Co Holding S.A. (NYSE:NTCO). This group of stocks’ market values are similar to DBX’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.4 hedge funds with bullish positions and the average amount invested in these stocks was $427 million. That figure was $968 million in DBX’s case. Universal Health Services, Inc. (NYSE:UHS) is the most popular stock in this table. On the other hand Natura &Co Holding S.A. (NYSE:NTCO) 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. Our overall hedge fund sentiment score for DBX is 78.4. 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. 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 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 and beat the market again by 3.6 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 -15.3% since the end of September (through 1/31) 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 all of these stocks already outperformed the market since 2019.

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