Why Are Hedge Funds Dumping Keysight Technologies (KEYS)?

Most of these hedge funds are quantitative hedge funds that probably invested in the stock because of its cheap valuation multiples. According to Yahoo Finance the stock has a forward PE ratio of 11. This is actually low enough to attract my attention too. I like investing in stocks that have an earnings yield of around 9% or more especially if their earnings are stable and growing. When I went over KEYS’ latest earnings report I noticed that the management is emphasizing non-GAAP earnings which exclude several valid and usually recurring expense items such as stock based compensation. KEYS’ share count increased from 167 million at the end of 2014 to 172 million at the end of 2015. The value of 5 million shares is nearly $140 million, a big number for a company that generated an operating cash flow of $376 million. If I treat the increase share count as pure expense, KEYS’ operating cash flow declines to about $240 million. Considering that the company has an EV of $5.1 billion, it trades at 20 times more than its adjusted cash flow.

The company announced a $200 million share repurchase program to counter the dilutive effect of stock based compensation. Overall, my conclusion is that KEYS doesn’t seem to be as attractively priced as it seems which is probably why hedge funds like Highbridge or Gotham Asset Management sold out of the stock during the fourth quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Keysight Technologies Inc (NYSE:KEYS). These stocks are Manhattan Associates, Inc. (NASDAQ:MANH), Biomed Realty Trust Inc (NYSE:BMR), StanCorp Financial Group, Inc. (NYSE:SFG), and Lions Gate Entertainment Corp. (USA) (NYSE:LGF). This group of stocks’ market values are similar to KEYS’s market value.

As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $793 million. That figure was $147 million in KEYS’ case. Lions Gate Entertainment Corp. (USA) (NYSE:LGF) is the most popular stock in this table. On the other hand Manhattan Associates, Inc. (NASDAQ:MANH) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks Keysight Technologies Inc (NYSE:KEYS) is even less popular than MANH. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article we don’t think it is a good idea to invest in this stock at the moment.