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Should You Avoid SurModics, Inc. (SRDX)?

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

SurModics, Inc. (NASDAQ:SRDX) was in 13 hedge funds’ portfolios at the end of the third quarter of 2019. SRDX has experienced a decrease in support from the world’s most elite money managers recently. There were 14 hedge funds in our database with SRDX positions at the end of the previous quarter. Our calculations also showed that SRDX 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.

At the moment there are numerous metrics market participants employ to appraise stocks. Two of the most useful metrics are hedge fund and insider trading signals. We have shown that, historically, those who follow the top picks of the top investment managers can beat the broader indices by a significant amount (see the details here).

Chuck Royce

Chuck Royce of Royce & Associates

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s go over the new hedge fund action surrounding SurModics, Inc. (NASDAQ:SRDX).

What have hedge funds been doing with SurModics, Inc. (NASDAQ:SRDX)?

At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the second quarter of 2019. On the other hand, there were a total of 13 hedge funds with a bullish position in SRDX a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Trigran Investments was the largest shareholder of SurModics, Inc. (NASDAQ:SRDX), with a stake worth $49 million reported as of the end of September. Trailing Trigran Investments was Renaissance Technologies, which amassed a stake valued at $44.3 million. Royce & Associates, AQR Capital Management, and Marshall Wace 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 Trigran Investments allocated the biggest weight to SurModics, Inc. (NASDAQ:SRDX), around 9.26% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.16 percent of its 13F equity portfolio to SRDX.

Judging by the fact that SurModics, Inc. (NASDAQ:SRDX) has faced a decline in interest from hedge fund managers, it’s safe to say that there lies a certain “tier” of money managers that elected to cut their positions entirely last quarter. Intriguingly, Benjamin A. Smith’s Laurion Capital Management said goodbye to the biggest investment of all the hedgies watched by Insider Monkey, worth about $0.4 million in call options. Ken Griffin’s fund, Citadel Investment Group, also cut its call options, about $0.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 1 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as SurModics, Inc. (NASDAQ:SRDX) but similarly valued. These stocks are AquaVenture Holdings Limited (NYSE:WAAS), At Home Group Inc. (NYSE:HOME), Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH), and W&T Offshore, Inc. (NYSE:WTI). This group of stocks’ market valuations resemble SRDX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WAAS 12 25073 3
HOME 16 201048 1
RUTH 16 49546 0
WTI 19 73231 -3
Average 15.75 87225 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $87 million. That figure was $139 million in SRDX’s case. W&T Offshore, Inc. (NYSE:WTI) is the most popular stock in this table. On the other hand AquaVenture Holdings Limited (NYSE:WAAS) is the least popular one with only 12 bullish hedge fund positions. SurModics, Inc. (NASDAQ:SRDX) 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 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. Unfortunately SRDX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SRDX investors were disappointed as the stock returned -10.3% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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