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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Stoke Therapeutics, Inc. (NASDAQ:STOK).
Is STOK a good stock to buy now? Stoke Therapeutics, Inc. (NASDAQ:STOK) was in 9 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 18. STOK shareholders have witnessed a decrease in support from the world's most elite money managers in recent months. There were 11 hedge funds in our database with STOK positions at the end of the second quarter. Our calculations also showed that STOK isn't among the 30 most popular stocks among hedge funds (click for Q3 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 66 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.
Phillip Gross of Adage Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. Keeping this in mind we're going to check out the new hedge fund action surrounding Stoke Therapeutics, Inc. (NASDAQ:STOK).
Do Hedge Funds Think STOK Is A Good Stock To Buy Now?
At Q3's end, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the second quarter of 2020. By comparison, 10 hedge funds held shares or bullish call options in STOK a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Redmile Group was the largest shareholder of Stoke Therapeutics, Inc. (NASDAQ:STOK), with a stake worth $85.4 million reported as of the end of September. Trailing Redmile Group was Cormorant Asset Management, which amassed a stake valued at $51.5 million. Perceptive Advisors, Adage Capital Management, and Casdin Capital 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 1.98% of its 13F portfolio. Redmile Group is also relatively very bullish on the stock, designating 1.57 percent of its 13F equity portfolio to STOK.
Since Stoke Therapeutics, Inc. (NASDAQ:STOK) has faced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of hedge funds that elected to cut their positions entirely in the third quarter. Interestingly, Peter Kolchinsky's RA Capital Management dumped the biggest stake of all the hedgies followed by Insider Monkey, totaling an estimated $26.7 million in stock. Israel Englander's fund, Millennium Management, also sold off its stock, about $6.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 2 funds in the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Stoke Therapeutics, Inc. (NASDAQ:STOK) but similarly valued. These stocks are Arcus Biosciences, Inc. (NYSE:RCUS), Athenex, Inc. (NASDAQ:ATNX), Applied Molecular Transport Inc. (NASDAQ:AMTI), Amerisafe, Inc. (NASDAQ:AMSF), Upland Software Inc (NASDAQ:UPLD), Surgery Partners, Inc. (NASDAQ:SGRY), and Heartland Financial USA Inc (NASDAQ:HTLF). This group of stocks' market valuations match STOK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RCUS,26,221219,-2 ATNX,25,359589,7 AMTI,2,37844,-6 AMSF,16,39024,4 UPLD,22,251535,6 SGRY,13,128594,-1 HTLF,7,10757,2 Average,15.9,149795,1.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.9 hedge funds with bullish positions and the average amount invested in these stocks was $150 million. That figure was $171 million in STOK's case. Arcus Biosciences, Inc. (NYSE:RCUS) is the most popular stock in this table. On the other hand Applied Molecular Transport Inc. (NASDAQ:AMTI) is the least popular one with only 2 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. Our overall hedge fund sentiment score for STOK is 32.6. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on STOK as the stock returned 54.2% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.