Did Hedge Funds Drop The Ball On Surface Oncology, Inc. (SURF) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 752 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of September 30th. In this article we look at what those investors think of Surface Oncology, Inc. (NASDAQ:SURF).

Surface Oncology, Inc. (NASDAQ:SURF) has seen a decrease in support from the world’s most elite money managers lately. Our calculations also showed that SURF isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Oleg Nodelman EcoR1 Capital

Oleg Nodelman of EcoR1 Capital

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to take a glance at the key hedge fund action surrounding Surface Oncology, Inc. (NASDAQ:SURF).

Hedge fund activity in Surface Oncology, Inc. (NASDAQ:SURF)

At Q3’s end, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -29% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SURF over the last 17 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

Is SURF A Good Stock To Buy?

The largest stake in Surface Oncology, Inc. (NASDAQ:SURF) was held by EcoR1 Capital, which reported holding $2.2 million worth of stock at the end of September. It was followed by Biotechnology Value Fund with a $1.5 million position. Other investors bullish on the company included Millennium Management, Citadel Investment Group, and Renaissance Technologies. In terms of the portfolio weights assigned to each position EcoR1 Capital allocated the biggest weight to Surface Oncology, Inc. (NASDAQ:SURF), around 0.28% of its 13F portfolio. Biotechnology Value Fund is also relatively very bullish on the stock, setting aside 0.16 percent of its 13F equity portfolio to SURF.

Judging by the fact that Surface Oncology, Inc. (NASDAQ:SURF) has experienced a decline in interest from the smart money, logic holds that there lies a certain “tier” of fund managers who sold off their positions entirely by the end of the third quarter. At the top of the heap, Srini Akkaraju and Michael Dybbs’s Samsara BioCapital dumped the biggest investment of all the hedgies followed by Insider Monkey, worth an estimated $0.2 million in stock. Donald Sussman’s fund, Paloma Partners, also cut its stock, about $0.1 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Surface Oncology, Inc. (NASDAQ:SURF) but similarly valued. We will take a look at Lazydays Holdings, Inc. (NASDAQ:LAZY), Zomedica Pharmaceuticals Corp. (NYSE:ZOM), Alimera Sciences Inc (NASDAQ:ALIM), and Quorum Health Corporation (NYSE:QHC). This group of stocks’ market values match SURF’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LAZY 5 8105 0
ZOM 5 64 3
ALIM 9 13895 0
QHC 11 7125 0
Average 7.5 7297 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $7 million. That figure was $5 million in SURF’s case. Quorum Health Corporation (NYSE:QHC) is the most popular stock in this table. On the other hand Lazydays Holdings, Inc. (NASDAQ:LAZY) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Surface Oncology, Inc. (NASDAQ:SURF) is even less popular than LAZY. Hedge funds clearly dropped the ball on SURF as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on SURF as the stock returned 47.9% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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