Is Sutro Biopharma, Inc. (STRO) A Good Stock To Buy?

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the fourth quarter of 2019. A significant number of hedge funds continued their strong performance in 2020 and 2021 as well. We get to see hedge funds’ thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Sutro Biopharma, Inc. (NASDAQ:STRO).

Is STRO a good stock to buy? Sutro Biopharma, Inc. (NASDAQ:STRO) was in 28 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 34. STRO has experienced a decrease in activity from the world’s largest hedge funds in recent months. There were 34 hedge funds in our database with STRO holdings at the end of December. Our calculations also showed that STRO isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 115 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.

Aaron Cowen Suvretta Capital

Aaron Cowen of Suvretta Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, economists warn of inflation flare up. So, we are checking out this backdoor gold play that has hit peak gains of 718% in a little over a year. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we’re going to view the recent hedge fund action regarding Sutro Biopharma, Inc. (NASDAQ:STRO).

Do Hedge Funds Think STRO Is A Good Stock To Buy Now?

At first quarter’s end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards STRO over the last 23 quarters. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Is STRO A Good Stock To Buy?

The largest stake in Sutro Biopharma, Inc. (NASDAQ:STRO) was held by RA Capital Management, which reported holding $48.2 million worth of stock at the end of December. It was followed by Samsara BioCapital with a $38.1 million position. Other investors bullish on the company included Holocene Advisors, Suvretta Capital Management, and Frazier Healthcare Partners. In terms of the portfolio weights assigned to each position Samsara BioCapital allocated the biggest weight to Sutro Biopharma, Inc. (NASDAQ:STRO), around 7.03% of its 13F portfolio. Frazier Healthcare Partners is also relatively very bullish on the stock, setting aside 1.83 percent of its 13F equity portfolio to STRO.

Because Sutro Biopharma, Inc. (NASDAQ:STRO) has witnessed a decline in interest from the smart money, we can see that there were a few hedgies that decided to sell off their positions entirely in the first quarter. At the top of the heap, Devesh Gandhi’s SilverArc Capital sold off the biggest position of all the hedgies monitored by Insider Monkey, totaling about $4 million in stock, and Vishal Saluja and Pham Quang’s Endurant Capital Management was right behind this move, as the fund dumped about $3.7 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 6 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Sutro Biopharma, Inc. (NASDAQ:STRO). These stocks are New Gold Inc. (NYSE:NGD), SI-BONE, Inc. (NASDAQ:SIBN), Gol Linhas Aereas Inteligentes SA (NYSE:GOL), SilverCrest Metals Inc. (NYSE:SILV), PyroGenesis Canada Inc. (NASDAQ:PYR), Anavex Life Sciences Corp. (NASDAQ:AVXL), and Curis, Inc. (NASDAQ:CRIS). All of these stocks’ market caps are similar to STRO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NGD 14 70037 2
SIBN 26 208026 -4
GOL 10 23402 -2
SILV 10 104893 0
PYR 3 1788 3
AVXL 5 4833 0
CRIS 29 493218 1
Average 13.9 129457 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.9 hedge funds with bullish positions and the average amount invested in these stocks was $129 million. That figure was $315 million in STRO’s case. Curis, Inc. (NASDAQ:CRIS) is the most popular stock in this table. On the other hand PyroGenesis Canada Inc. (NASDAQ:PYR) is the least popular one with only 3 bullish hedge fund positions. Sutro Biopharma, Inc. (NASDAQ:STRO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for STRO is 71.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through July 9th and beat the market again by 6.7 percentage points. Unfortunately STRO wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on STRO were disappointed as the stock returned -19.8% since the end of March (through 7/9) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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