Hedge Funds Are Selling Trex Company, Inc. (TREX)

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don’t make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Trex Company, Inc. (NYSE:TREX) to find out whether there were any major changes in hedge funds’ views.

Is Trex Company, Inc. (NYSE:TREX) a healthy stock for your portfolio? Money managers were taking a bearish view. The number of bullish hedge fund positions retreated by 7 in recent months. Trex Company, Inc. (NYSE:TREX) was in 23 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 30. Our calculations also showed that TREX isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 30 hedge funds in our database with TREX holdings at the end of December.

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.

Alex Litowitz Magnetar Capital

Alex Litowitz of Magnetar Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery 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 review the new hedge fund action surrounding Trex Company, Inc. (NYSE:TREX).

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

At the end of March, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from the fourth quarter of 2020. Below, you can check out the change in hedge fund sentiment towards TREX over the last 23 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Trex Company, Inc. (NYSE:TREX) was held by Broad Bay Capital, which reported holding $74.5 million worth of stock at the end of December. It was followed by Montanaro Asset Management with a $49.3 million position. Other investors bullish on the company included Point72 Asset Management, Millennium Management, and Driehaus Capital. In terms of the portfolio weights assigned to each position Broad Bay Capital allocated the biggest weight to Trex Company, Inc. (NYSE:TREX), around 8.71% of its 13F portfolio. Montanaro Asset Management is also relatively very bullish on the stock, earmarking 7.25 percent of its 13F equity portfolio to TREX.

Seeing as Trex Company, Inc. (NYSE:TREX) has faced bearish sentiment from the smart money, it’s safe to say that there were a few funds that slashed their entire stakes heading into Q2. At the top of the heap, Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors dumped the largest position of all the hedgies watched by Insider Monkey, valued at an estimated $20.3 million in stock, and Principal Global Investors’s Columbus Circle Investors was right behind this move, as the fund dumped about $17.7 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 7 funds heading into Q2.

Let’s check out hedge fund activity in other stocks similar to Trex Company, Inc. (NYSE:TREX). These stocks are CBOE Global Markets Inc (NASDAQ:CBOE), American Homes 4 Rent (NYSE:AMH), Cemex SAB de CV (NYSE:CX), Five9 Inc (NASDAQ:FIVN), Lithia Motors Inc (NYSE:LAD), East West Bancorp, Inc. (NASDAQ:EWBC), and Bright Horizons Family Solutions Inc (NYSE:BFAM). 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
CBOE 33 767928 -5
AMH 27 677079 0
CX 24 471444 2
FIVN 45 1641865 -2
LAD 40 2316536 1
EWBC 25 467070 1
BFAM 18 78337 -2
Average 30.3 917180 -0.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.3 hedge funds with bullish positions and the average amount invested in these stocks was $917 million. That figure was $204 million in TREX’s case. Five9 Inc (NASDAQ:FIVN) is the most popular stock in this table. On the other hand Bright Horizons Family Solutions Inc (NYSE:BFAM) is the least popular one with only 18 bullish hedge fund positions. Trex Company, Inc. (NYSE:TREX) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TREX is 30.3. 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 23.8% in 2021 through July 16th and surpassed the market again by 7.7 percentage points. Unfortunately TREX wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); TREX investors were disappointed as the stock returned 4.9% since the end of March (through 7/16) 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.