We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let’s see whether Trex Company, Inc. (NYSE:TREX) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Is Trex Company, Inc. (NYSE:TREX) a buy here? Hedge funds are getting less bullish. The number of long hedge fund positions dropped by 1 recently. Our calculations also showed that TREX isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Dmitry Balyasny of Balyasny Asset Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s view the recent hedge fund action surrounding Trex Company, Inc. (NYSE:TREX).
What does smart money think about Trex Company, Inc. (NYSE:TREX)?
Heading into the first quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in TREX a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Broad Bay Capital held the most valuable stake in Trex Company, Inc. (NYSE:TREX), which was worth $31.5 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $25.4 million worth of shares. Balyasny Asset Management, Driehaus Capital, and PDT Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Broad Bay Capital allocated the biggest weight to Trex Company, Inc. (NYSE:TREX), around 7.5% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, designating 0.46 percent of its 13F equity portfolio to TREX.
Seeing as Trex Company, Inc. (NYSE:TREX) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few fund managers who were dropping their entire stakes heading into Q4. Intriguingly, Mark Coe’s Intrinsic Edge Capital dropped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $12.8 million in stock, and Hoon Kim’s Quantinno Capital was right behind this move, as the fund said goodbye to about $0.7 million worth. These moves are important to note, as total hedge fund interest was cut by 1 funds heading into Q4.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Trex Company, Inc. (NYSE:TREX) but similarly valued. These stocks are Elastic N.V. (NYSE:ESTC), Companhia Energetica Minas Gerais (NYSE:CIG), Crane Co. (NYSE:CR), and Alliance Data Systems Corporation (NYSE:ADS). 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 |
|---|---|---|---|
| ESTC | 39 | 919990 | 8 |
| CIG | 9 | 57674 | 1 |
| CR | 23 | 359867 | 0 |
| ADS | 45 | 1320134 | 6 |
| Average | 29 | 664416 | 3.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $664 million. That figure was $111 million in TREX’s case. Alliance Data Systems Corporation (NYSE:ADS) is the most popular stock in this table. On the other hand Companhia Energetica Minas Gerais (NYSE:CIG) is the least popular one with only 9 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 calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on TREX as the stock returned -9.4% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
