Did Hedge Funds Make The Right Call On Trex Company, Inc. (TREX) ?

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 Trex Company, Inc. (NYSE:TREX) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Trex Company, Inc. (NYSE:TREX) has seen a decrease in enthusiasm from smart money recently. Our calculations also showed that TREX 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Mark Kingdon - Kingdon Capital

Mark Kingdon of Kingdon Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to go over the recent hedge fund action encompassing Trex Company, Inc. (NYSE:TREX).

How have hedgies been trading Trex Company, Inc. (NYSE:TREX)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in TREX over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Richard Scott Greeder’s Broad Bay Capital has the largest position in Trex Company, Inc. (NYSE:TREX), worth close to $43 million, accounting for 11.8% of its total 13F portfolio. Sitting at the No. 2 spot is Mark Kingdon of Kingdon Capital, with a $14.9 million position; the fund has 2.7% of its 13F portfolio invested in the stock. Remaining peers that hold long positions encompass Principal Global Investors’s Columbus Circle Investors, Richard Driehaus’s Driehaus Capital and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Broad Bay Capital allocated the biggest weight to Trex Company, Inc. (NYSE:TREX), around 11.83% of its 13F portfolio. Kingdon Capital is also relatively very bullish on the stock, setting aside 2.73 percent of its 13F equity portfolio to TREX.

Seeing as Trex Company, Inc. (NYSE:TREX) has experienced falling interest from hedge fund managers, logic holds that there is a sect of hedgies that slashed their positions entirely last quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the biggest position of the 750 funds followed by Insider Monkey, valued at an estimated $25.4 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund said goodbye to about $4 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Trex Company, Inc. (NYSE:TREX) but similarly valued. These stocks are Ares Capital Corporation (NASDAQ:ARCC), Sonoco Products Company (NYSE:SON), Credit Acceptance Corp. (NASDAQ:CACC), and Tallgrass Energy, LP (NYSE:TGE). All of these stocks’ market caps are similar to TREX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ARCC 26 128884 4
SON 23 122325 -1
CACC 22 581386 -9
TGE 38 692822 7
Average 27.25 381354 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $381 million. That figure was $93 million in TREX’s case. Tallgrass Energy, LP (NYSE:TGE) is the most popular stock in this table. On the other hand Credit Acceptance Corp. (NASDAQ:CACC) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Trex Company, Inc. (NYSE:TREX) is even less popular than CACC. Hedge funds clearly dropped the ball on TREX as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on TREX as the stock returned 73.4% since the end of March and outperformed the market by an even larger margin.

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