Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
Dropbox, Inc. (NASDAQ:DBX) investors should pay attention to an increase in hedge fund sentiment recently. Our calculations also showed that DBX isn’t among the 30 most popular stocks among hedge funds.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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.
We’re going to take a look at the recent hedge fund action surrounding Dropbox, Inc. (NASDAQ:DBX).
Hedge fund activity in Dropbox, Inc. (NASDAQ:DBX)
Heading into the first quarter of 2019, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 30% from one quarter earlier. By comparison, 35 hedge funds held shares or bullish call options in DBX a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Dropbox, Inc. (NASDAQ:DBX) was held by Hunt Lane Capital, which reported holding $72.5 million worth of stock at the end of September. It was followed by Holocene Advisors with a $54.4 million position. Other investors bullish on the company included Polar Capital, Valiant Capital, and Partner Fund Management.
As aggregate interest increased, key money managers have been driving this bullishness. Holocene Advisors, managed by Brandon Haley, established the most outsized position in Dropbox, Inc. (NASDAQ:DBX). Holocene Advisors had $54.4 million invested in the company at the end of the quarter. Marcelo Desio’s Lucha Capital Management also made a $18.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Joseph A. Jolson’s Harvest Capital Strategies, Matthew Hulsizer’s PEAK6 Capital Management, and Matthew Tewksbury’s Stevens Capital Management.
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 Nielsen Holdings plc (NYSE:NLSN), DENTSPLY SIRONA Inc. (NASDAQ:XRAY), Tata Motors Limited (NYSE:TTM), and Trimble Inc. (NASDAQ:TRMB). This group of stocks’ market caps match DBX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NLSN | 35 | 1289343 | 0 |
| XRAY | 27 | 1420722 | -1 |
| TTM | 9 | 108095 | 0 |
| TRMB | 17 | 493848 | 0 |
| Average | 22 | 828002 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $828 million. That figure was $407 million in DBX’s case. Nielsen Holdings plc (NYSE:NLSN) is the most popular stock in this table. On the other hand Tata Motors Limited (NYSE:TTM) is the least popular one with only 9 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. 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 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately DBX wasn’t in this group. Hedge funds that bet on DBX were disappointed as the stock returned 8.4% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.
