Hedge Funds Have Never Been This Bullish On Box, Inc. (BOX)

Debasis Saha

Sat, Mar 28, 2020, 6:53 PM 6 min read

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Box, Inc. (NYSE:BOX) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Box, Inc. (NYSE:BOX) investors should pay attention to an increase in hedge fund sentiment in recent months. BOX was in 35 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 33 hedge funds in our database with BOX positions at the end of the previous quarter. Our calculations also showed that BOX isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 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 41 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.

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now we're going to analyze the recent hedge fund action regarding Box, Inc. (NYSE:BOX).

Hedge fund activity in Box, Inc. (NYSE:BOX)

At the end of the fourth quarter, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards BOX over the last 18 quarters. 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).

Among these funds, Starboard Value LP held the most valuable stake in Box, Inc. (NYSE:BOX), which was worth $122.1 million at the end of the third quarter. On the second spot was Bares Capital Management which amassed $99.7 million worth of shares. RGM Capital, Dorsal Capital Management, and Millennium Management 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 North Run Capital allocated the biggest weight to Box, Inc. (NYSE:BOX), around 6.74% of its 13F portfolio. Potrero Capital Research is also relatively very bullish on the stock, designating 5.92 percent of its 13F equity portfolio to BOX.

As industrywide interest jumped, specific money managers have been driving this bullishness. PDT Partners, managed by Peter Muller, initiated the largest position in Box, Inc. (NYSE:BOX). PDT Partners had $1.9 million invested in the company at the end of the quarter. Michael Gelband's ExodusPoint Capital also made a $1.6 million investment in the stock during the quarter. The other funds with brand new BOX positions are Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors, Paul Marshall and Ian Wace's Marshall Wace LLP, and Donald Sussman's Paloma Partners.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Box, Inc. (NYSE:BOX) but similarly valued. These stocks are Genesis Energy, L.P. (NYSE:GEL), ABM Industries, Inc. (NYSE:ABM), National General Holdings Corp (NASDAQ:NGHC), and Belden Inc. (NYSE:BDC). All of these stocks' market caps are closest to BOX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GEL,1,17341,-1 ABM,12,62128,-2 NGHC,16,238246,-1 BDC,12,64705,-1 Average,10.25,95605,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $96 million. That figure was $545 million in BOX's case. National General Holdings Corp (NASDAQ:NGHC) is the most popular stock in this table. On the other hand Genesis Energy, L.P. (NYSE:GEL) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Box, Inc. (NYSE:BOX) is more popular among hedge funds. 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 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately BOX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on BOX were disappointed as the stock returned -23.9% during the first two and a half months of 2020 (through March 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.