Should I Avoid Sutro Biopharma, Inc. (STRO)?

·6 min read

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Sutro Biopharma, Inc. (NASDAQ:STRO)? The smart money sentiment can provide an answer to this question.

Is Sutro Biopharma, Inc. (NASDAQ:STRO) the right investment to pursue these days? Investors who are in the know were reducing their bets on the stock. The number of long hedge fund bets retreated by 2 lately. Sutro Biopharma, Inc. (NASDAQ:STRO) was in 26 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 34. Our calculations also showed that STRO isn't among the 30 most popular stocks among hedge funds (click for Q2 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 79 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.

Ryan Tolkin, CIO of Schonfeld Strategic Advisors

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV 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. Keeping this in mind let's take a look at the key hedge fund action encompassing Sutro Biopharma, Inc. (NASDAQ:STRO).

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

Heading into the third quarter of 2021, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards STRO over the last 24 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is STRO A Good Stock To Buy?
Is STRO A Good Stock To Buy?

More specifically, Suvretta Capital Management was the largest shareholder of Sutro Biopharma, Inc. (NASDAQ:STRO), with a stake worth $31.9 million reported as of the end of June. Trailing Suvretta Capital Management was Samsara BioCapital, which amassed a stake valued at $31.1 million. Holocene Advisors, Point72 Asset Management, and Frazier Healthcare Partners 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 3.85% of its 13F portfolio. Frazier Healthcare Partners is also relatively very bullish on the stock, dishing out 1.72 percent of its 13F equity portfolio to STRO.

Since Sutro Biopharma, Inc. (NASDAQ:STRO) has experienced falling interest from the aggregate hedge fund industry, logic holds that there were a few hedge funds who sold off their entire stakes heading into Q3. Interestingly, Peter Kolchinsky's RA Capital Management said goodbye to the biggest position of the "upper crust" of funds tracked by Insider Monkey, valued at about $48.2 million in stock. Ryan Tolkin (CIO)'s fund, Schonfeld Strategic Advisors, also cut its stock, about $1.6 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 2 funds heading into Q3.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Sutro Biopharma, Inc. (NASDAQ:STRO) but similarly valued. These stocks are Modine Manufacturing Company (NYSE:MOD), Liquidity Services, Inc. (NASDAQ:LQDT), Tucows Inc. (NYSE:TCX), Organigram Holdings Inc. (NASDAQ:OGI), VBI Vaccines, Inc. (NASDAQ:VBIV), The Manitowoc Company, Inc. (NYSE:MTW), and Aspen Aerogels Inc (NYSE:ASPN). This group of stocks' market valuations are similar to STRO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MOD,18,149855,1 LQDT,8,88768,0 TCX,8,117520,1 OGI,6,5958,-3 VBIV,10,194621,3 MTW,13,39241,-4 ASPN,20,147878,7 Average,11.9,106263,0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.9 hedge funds with bullish positions and the average amount invested in these stocks was $106 million. That figure was $223 million in STRO's case. Aspen Aerogels Inc (NYSE:ASPN) is the most popular stock in this table. On the other hand Organigram Holdings Inc. (NASDAQ:OGI) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Sutro Biopharma, Inc. (NASDAQ:STRO) is more popular among hedge funds. Our overall hedge fund sentiment score for STRO is 75.9. 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. 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 returned 24.9% in 2021 through October 15th but still managed to beat the market by 4.5 percentage points. Hedge funds were also right about betting on STRO as the stock returned 2.2% since the end of June (through 10/15) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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