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Did Hedge Funds Drop The Ball On Trex Company, Inc. (TREX) ?

Nina Todic

The market has been volatile in the fourth quarter as the Federal Reserve continued its rate hikes to normalize the interest rates. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, and the funds' movements is one of the reasons why the major indexes have retraced. In this article, we analyze what the smart money thinks of Trex Company, Inc. (NYSE:TREX) and find out how it is affected by hedge funds' moves.

Trex Company, Inc. (NYSE:TREX) has seen a decrease in support from the world's most elite money managers recently. TREX was in 14 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 17 hedge funds in our database with TREX holdings at the end of the previous quarter. Our calculations also showed that trex isn't among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

GOTHAM ASSET MANAGEMENT

We're going to take a peek at the latest hedge fund action regarding Trex Company, Inc. (NYSE:TREX).

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

At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards TREX over the last 14 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds With TREX Positions

More specifically, Millennium Management was the largest shareholder of Trex Company, Inc. (NYSE:TREX), with a stake worth $13.5 million reported as of the end of September. Trailing Millennium Management was Broad Bay Capital, which amassed a stake valued at $9.7 million. Renaissance Technologies, Osterweis Capital Management, and Gotham Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.

Because Trex Company, Inc. (NYSE:TREX) has experienced declining sentiment from hedge fund managers, logic holds that there exists a select few fund managers that slashed their entire stakes last quarter. Interestingly, Eduardo Abush's Waterfront Capital Partners sold off the largest stake of the 700 funds tracked by Insider Monkey, comprising close to $15 million in stock, and Ken Grossman and Glen Schneider's SG Capital Management was right behind this move, as the fund dropped about $9.1 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to Trex Company, Inc. (NYSE:TREX). We will take a look at Teladoc Health, Inc. (NYSE:TDOC), CVR Energy, Inc. (NYSE:CVI), Helen of Troy Limited (NASDAQ:HELE), and Mattel, Inc. (NASDAQ:MAT). This group of stocks' market valuations match TREX's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TDOC,19,139059,0 CVI,22,2577069,1 HELE,17,134005,5 MAT,15,546082,-1 Average,18.25,849054,1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $849 million. That figure was $57 million in TREX's case. CVR Energy, Inc. (NYSE:CVI) is the most popular stock in this table. On the other hand Mattel, Inc. (NASDAQ:MAT) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Trex Company, Inc. (NYSE:TREX) is even less popular than MAT. 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on TREX as the stock returned 26.5% and outperformed the market by an even larger margin.

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

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