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Hedge Funds Never Been This Bullish On Trex Company, Inc. (TREX)

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Trex Company, Inc. (NYSE:TREX) based on that data and determine whether they were really smart about the stock.

Is Trex Company, Inc. (NYSE:TREX) the right investment to pursue these days? The smart money was taking a bullish view. The number of long hedge fund bets inched up by 11 in recent months. Trex Company, Inc. (NYSE:TREX) was in 28 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 21. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that TREX isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Now we’re going to check out the recent hedge fund action surrounding Trex Company, Inc. (NYSE:TREX).

How are hedge funds trading Trex Company, Inc. (NYSE:TREX)?

At the end of June, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 65% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards TREX over the last 20 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Richard Scott Greeder’s Broad Bay Capital has the biggest position in Trex Company, Inc. (NYSE:TREX), worth close to $75.3 million, corresponding to 13.5% of its total 13F portfolio. The second largest stake is held by Arrowstreet Capital, led by Peter Rathjens, Bruce Clarke and John Campbell, holding a $33.6 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining peers that are bullish comprise Israel Englander’s Millennium Management, Principal Global Investors’s Columbus Circle Investors 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 13.46% of its 13F portfolio. Columbus Circle Investors is also relatively very bullish on the stock, setting aside 0.82 percent of its 13F equity portfolio to TREX.

As industrywide interest jumped, specific money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the biggest position in Trex Company, Inc. (NYSE:TREX). Arrowstreet Capital had $33.6 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $26.1 million position during the quarter. The other funds with new positions in the stock are Donald Sussman’s Paloma Partners, Noam Gottesman’s GLG Partners, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.

Let’s go over hedge fund activity in other stocks similar to Trex Company, Inc. (NYSE:TREX). These stocks are Iron Mountain Incorporated (NYSE:IRM), Textron Inc. (NYSE:TXT), The Scotts Miracle-Gro Company (NYSE:SMG), Molson Coors Beverage Company (NYSE:TAP), Gaming and Leisure Properties Inc (NASDAQ:GLPI), Melco Resorts & Entertainment Limited (NASDAQ:MLCO), and Ally Financial Inc (NYSE:ALLY). This group of stocks’ market values are closest to TREX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IRM 22 64987 3
TXT 24 267696 2
SMG 30 307814 2
TAP 36 274462 2
GLPI 35 498974 0
MLCO 32 610443 4
ALLY 54 1635686 9
Average 33.3 522866 3.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $523 million. That figure was $222 million in TREX’s case. Ally Financial Inc (NYSE:ALLY) is the most popular stock in this table. On the other hand Iron Mountain Incorporated (NYSE:IRM) is the least popular one with only 22 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 49.4. 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 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately TREX wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); TREX investors were disappointed as the stock returned 5.3% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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