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Were Hedge Funds Right About Souring On Sutro Biopharma, Inc. (STRO)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards Sutro Biopharma, Inc. (NASDAQ:STRO) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Sutro Biopharma, Inc. (NASDAQ:STRO) investors should pay attention to a decrease in hedge fund interest recently. Our calculations also showed that STRO 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.

In the 21st century investor’s toolkit there are plenty of signals stock market investors employ to analyze their holdings. Two of the most underrated signals are hedge fund and insider trading interest. We have shown that, historically, those who follow the best picks of the best fund managers can outclass the S&P 500 by a significant margin (see the details here).

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, we take a look at lists like the 10 most profitable companies in the world to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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 recent hedge fund action surrounding Sutro Biopharma, Inc. (NASDAQ:STRO).

How are hedge funds trading Sutro Biopharma, Inc. (NASDAQ:STRO)?

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards STRO over the last 18 quarters. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Is STRO A Good Stock To Buy?

Among these funds, Citadel Investment Group held the most valuable stake in Sutro Biopharma, Inc. (NASDAQ:STRO), which was worth $15.8 million at the end of the third quarter. On the second spot was Samsara BioCapital which amassed $11.5 million worth of shares. Camber Capital Management, Biotechnology Value Fund / BVF Inc, 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 Samsara BioCapital allocated the biggest weight to Sutro Biopharma, Inc. (NASDAQ:STRO), around 6.61% of its 13F portfolio. Biotechnology Value Fund / BVF Inc is also relatively very bullish on the stock, earmarking 0.45 percent of its 13F equity portfolio to STRO.

Judging by the fact that Sutro Biopharma, Inc. (NASDAQ:STRO) has faced declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of money managers who sold off their full holdings last quarter. At the top of the heap, Vishal Saluja and Pham Quang’s Endurant Capital Management said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, totaling about $0.4 million in stock.  Renaissance Technologies, also sold off its stock, about $0.1 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 1 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Sutro Biopharma, Inc. (NASDAQ:STRO). These stocks are EZCORP Inc (NASDAQ:EZPW), RISE Education Cayman Ltd (NASDAQ:REDU), GameStop Corp. (NYSE:GME), and Entercom Communications Corp. (NYSE:ETM). This group of stocks’ market caps resemble STRO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EZPW 15 49680 -6
REDU 2 733 -1
GME 17 43259 -3
ETM 17 13101 -6
Average 12.75 26693 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $27 million. That figure was $50 million in STRO’s case. GameStop Corp. (NYSE:GME) is the most popular stock in this table. On the other hand RISE Education Cayman Ltd (NASDAQ:REDU) is the least popular one with only 2 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. 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 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately STRO wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on STRO were disappointed as the stock returned -17.8% during the same time period 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 many of these stocks already outperformed the market so far this year.

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