Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Dropbox, Inc. (NASDAQ:DBX).
Dropbox, Inc. (NASDAQ:DBX) investors should be aware of a decrease in enthusiasm from smart money of late. Our calculations also showed that dbx isn’t among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We’re going to analyze the recent hedge fund action surrounding Dropbox, Inc. (NASDAQ:DBX).
How have hedgies been trading Dropbox, Inc. (NASDAQ:DBX)?
At the end of the first quarter, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards DBX over the last 15 quarters. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
More specifically, Hunt Lane Capital was the largest shareholder of Dropbox, Inc. (NASDAQ:DBX), with a stake worth $73.6 million reported as of the end of March. Trailing Hunt Lane Capital was Two Sigma Advisors, which amassed a stake valued at $68.7 million. Millennium Management, D E Shaw, and Partner Fund Management were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as Dropbox, Inc. (NASDAQ:DBX) has faced bearish sentiment from the aggregate hedge fund industry, we can see that there is a sect of funds that elected to cut their entire stakes last quarter. Intriguingly, Brandon Haley’s Holocene Advisors dumped the largest investment of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $54.4 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund cut about $16.1 million worth. These moves are important to note, as total hedge fund interest dropped by 2 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Dropbox, Inc. (NASDAQ:DBX) but similarly valued. We will take a look at A. O. Smith Corporation (NYSE:AOS), National Retail Properties, Inc. (NYSE:NNN), LKQ Corporation (NASDAQ:LKQ), and Reinsurance Group of America Inc (NYSE:RGA). This group of stocks’ market values are closest to DBX’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AOS | 27 | 475457 | -2 |
| NNN | 12 | 248443 | -3 |
| LKQ | 43 | 1068048 | 3 |
| RGA | 23 | 409256 | -4 |
| Average | 26.25 | 550301 | -1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $550 million. That figure was $427 million in DBX’s case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand National Retail Properties, Inc. (NYSE:NNN) is the least popular one with only 12 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 calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on DBX as the stock returned 2.7% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
