Were Hedge Funds Right About Selling Schrodinger, Inc. (SDGR)?

At Insider Monkey, we pore over the filings of nearly 866 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of March 31st. In this article, we will use that wealth of knowledge to determine whether or not Schrodinger, Inc. (NASDAQ:SDGR) makes for a good investment right now.

Schrodinger, Inc. (NASDAQ:SDGR) was in 17 hedge funds’ portfolios at the end of March. The all time high for this statistic is 24. SDGR has experienced a decrease in enthusiasm from smart money recently. There were 24 hedge funds in our database with SDGR holdings at the end of December. Our calculations also showed that SDGR 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.

Matthew Hulsizer of PEAK6 Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 view the recent hedge fund action encompassing Schrodinger, Inc. (NASDAQ:SDGR).

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

At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -29% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SDGR over the last 23 quarters. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

The largest stake in Schrodinger, Inc. (NASDAQ:SDGR) was held by Bill & Melinda Gates Foundation Trust, which reported holding $532.6 million worth of stock at the end of December. It was followed by ARK Investment Management with a $195.4 million position. Other investors bullish on the company included Laurion Capital Management, Valiant Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Schrodinger, Inc. (NASDAQ:SDGR), around 2.54% of its 13F portfolio. Valiant Capital is also relatively very bullish on the stock, setting aside 1.95 percent of its 13F equity portfolio to SDGR.

Since Schrodinger, Inc. (NASDAQ:SDGR) has experienced falling interest from the smart money, it’s easy to see that there lies a certain “tier” of hedge funds that decided to sell off their full holdings last quarter. At the top of the heap, Richard Driehaus’s Driehaus Capital dropped the biggest investment of the “upper crust” of funds watched by Insider Monkey, worth an estimated $20.9 million in stock. John Overdeck and David Siegel’s fund, Two Sigma Advisors, also dumped its stock, about $6.2 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 7 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Schrodinger, Inc. (NASDAQ:SDGR) but similarly valued. We will take a look at ACV Auctions Inc. (NASDAQ:ACVA), Grupo Aeroportuario del Sureste (NYSE:ASR), National Oilwell Varco, Inc. (NYSE:NOV), Fox Factory Holding Corp (NASDAQ:FOXF), TIM S.A. (NYSE:TIMB), Inari Medical, Inc. (NASDAQ:NARI), and Vroom, Inc. (NASDAQ:VRM). This group of stocks’ market caps resemble SDGR’s market cap.

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As you can see these stocks had an average of 18.7 hedge funds with bullish positions and the average amount invested in these stocks was $293 million. That figure was $931 million in SDGR’s case. National Oilwell Varco, Inc. (NYSE:NOV) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Sureste (NYSE:ASR) is the least popular one with only 8 bullish hedge fund positions. Schrodinger, Inc. (NASDAQ:SDGR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SDGR is 40.7. 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 negative signal and 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 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately SDGR wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); SDGR investors were disappointed as the stock returned -8.4% since the end of March (through 7/23) 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 most of these stocks already outperformed the market in 2021.

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

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