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Were Hedge Funds Right About Souring On Trex Company, Inc. (TREX)?

Nina Todic

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Trex Company, Inc. (NYSE:TREX).

Trex Company, Inc. (NYSE:TREX) shareholders have witnessed a decrease in support from the world's most elite money managers in recent months. Our calculations also showed that TREX isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_221556" align="aligncenter" width="450"] Richard Driehaus of Driehaus Capital[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to take a glance at the fresh hedge fund action encompassing Trex Company, Inc. (NYSE:TREX).

What does smart money think about Trex Company, Inc. (NYSE:TREX)?

At the end of the third quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in TREX a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Broad Bay Capital, managed by Richard Scott Greeder, holds the number one position in Trex Company, Inc. (NYSE:TREX). Broad Bay Capital has a $29.2 million position in the stock, comprising 7.8% of its 13F portfolio. The second most bullish fund manager is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $13.9 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions include Mark Coe's Intrinsic Edge Capital, Ken Griffin's Citadel Investment Group and Richard Driehaus's 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 7.8% of its 13F portfolio. Intrinsic Edge Capital is also relatively very bullish on the stock, earmarking 1.43 percent of its 13F equity portfolio to TREX.

Seeing as Trex Company, Inc. (NYSE:TREX) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there exists a select few funds that decided to sell off their full holdings last quarter. Interestingly, Dmitry Balyasny's Balyasny Asset Management dumped the largest position of the 750 funds followed by Insider Monkey, worth an estimated $32.6 million in stock. Ken Grossman and Glen Schneider's fund, SG Capital Management, also dropped its stock, about $21.2 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds last quarter.

Let's check out hedge fund activity in other stocks similar to Trex Company, Inc. (NYSE:TREX). These stocks are Williams-Sonoma, Inc. (NYSE:WSM), PG&E Corporation (NYSE:PCG), NewMarket Corporation (NYSE:NEU), and Moderna, Inc. (NASDAQ:MRNA). All of these stocks' market caps are closest to TREX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WSM,24,287642,-3 PCG,64,2847473,-3 NEU,27,193660,7 MRNA,8,204933,-10 Average,30.75,883427,-2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $883 million. That figure was $104 million in TREX's case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Moderna, Inc. (NASDAQ:MRNA) is the least popular one with only 8 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. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TREX wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TREX investors were disappointed as the stock returned -5.4% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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