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Here is What Hedge Funds Think About Stoke Therapeutics, Inc. (STOK)

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 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 March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtStoke Therapeutics, Inc. (NASDAQ:STOK) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Hedge fund interest in Stoke Therapeutics, Inc. (NASDAQ:STOK) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as AZZ Incorporated (NYSE:AZZ), Medifast, Inc. (NYSE:MED), and Pampa Energia S.A. (NYSE:PAM) to gather more data points. Our calculations also showed that STOK isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by 58 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.

Peter Kolchinsky of RA Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a glance at the latest hedge fund action encompassing Stoke Therapeutics, Inc. (NASDAQ:STOK).

Hedge fund activity in Stoke Therapeutics, Inc. (NASDAQ:STOK)

At Q1’s end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2019. On the other hand, there were a total of 0 hedge funds with a bullish position in STOK a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Among these funds, Redmile Group held the most valuable stake in Stoke Therapeutics, Inc. (NASDAQ:STOK), which was worth $49.6 million at the end of the third quarter. On the second spot was Cormorant Asset Management which amassed $39.2 million worth of shares. RA Capital Management, Perceptive Advisors, and Adage Capital 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 Cormorant Asset Management allocated the biggest weight to Stoke Therapeutics, Inc. (NASDAQ:STOK), around 1.82% of its 13F portfolio. Redmile Group is also relatively very bullish on the stock, dishing out 1.39 percent of its 13F equity portfolio to STOK.

Due to the fact that Stoke Therapeutics, Inc. (NASDAQ:STOK) has faced a decline in interest from the aggregate hedge fund industry, logic holds that there was a specific group of hedgies who sold off their full holdings last quarter. Intriguingly, Stuart J. Zimmer’s Zimmer Partners dumped the biggest position of the 750 funds watched by Insider Monkey, worth an estimated $0.7 million in stock. Warren Lammert’s fund, Granite Point Capital, also dumped its stock, about $0.4 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Stoke Therapeutics, Inc. (NASDAQ:STOK) but similarly valued. We will take a look at AZZ Incorporated (NYSE:AZZ), Medifast, Inc. (NYSE:MED), Pampa Energia S.A. (NYSE:PAM), and Benchmark Electronics, Inc. (NYSE:BHE). This group of stocks’ market caps match STOK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AZZ 17 30591 1
MED 16 217606 -3
PAM 7 36956 -3
BHE 14 24868 -5
Average 13.5 77505 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $78 million. That figure was $141 million in STOK’s case. AZZ Incorporated (NYSE:AZZ) is the most popular stock in this table. On the other hand Pampa Energia S.A. (NYSE:PAM) is the least popular one with only 7 bullish hedge fund positions. Stoke Therapeutics, Inc. (NASDAQ:STOK) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately STOK wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); STOK investors were disappointed as the stock returned 4.1% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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