Should I Buy Trex Company, Inc. (TREX)?

In this article we will check out the progression of hedge fund sentiment towards Trex Company, Inc. (NYSE:TREX) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Trex Company, Inc. (NYSE:TREX) worth your attention right now? Prominent investors were in a bullish mood. The number of bullish hedge fund positions advanced by 2 lately. Trex Company, Inc. (NYSE:TREX) was in 25 hedge funds’ portfolios at the end of the second 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 Q2 rankings). There were 23 hedge funds in our database with TREX positions at the end of the first quarter.

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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV 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. Now we’re going to go over the fresh hedge fund action regarding Trex Company, Inc. (NYSE:TREX).

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

At Q2’s end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in TREX over the last 24 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 $61.4 million worth of stock at the end of June. It was followed by Montanaro Asset Management with a $54.2 million position. Other investors bullish on the company included Citadel Investment Group, Point72 Asset 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 7.27% of its 13F portfolio. Montanaro Asset Management is also relatively very bullish on the stock, designating 6.82 percent of its 13F equity portfolio to TREX.

Consequently, key money managers have jumped into Trex Company, Inc. (NYSE:TREX) headfirst. Carlson Capital, managed by Clint Carlson, established the most outsized position in Trex Company, Inc. (NYSE:TREX). Carlson Capital had $3.2 million invested in the company at the end of the quarter. D. E. Shaw’s D E Shaw also initiated a $1 million position during the quarter. The other funds with new positions in the stock are Qing Li’s Sciencast Management, Donald Sussman’s Paloma Partners, and Greg Poole’s Echo Street Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to Trex Company, Inc. (NYSE:TREX). These stocks are Grifols SA (NASDAQ:GRFS), The Toro Company (NYSE:TTC), Newell Brands Inc. (NASDAQ:NWL), Molson Coors Beverage Company (NYSE:TAP), BorgWarner Inc. (NYSE:BWA), Zynga Inc (NASDAQ:ZNGA), and A. O. Smith Corporation (NYSE:AOS). This group of stocks’ market valuations are closest to TREX’s market valuation.

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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 $890 million. That figure was $206 million in TREX’s case. Zynga Inc (NASDAQ:ZNGA) is the most popular stock in this table. On the other hand Grifols SA (NASDAQ:GRFS) is the least popular one with only 14 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 47.7. 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 24% in 2021 through October 22nd and surpassed the market again by 1.6 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 -7.3% since the end of June (through 10/22) 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.