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Hedge Funds Were Buying KeyCorp (KEY) Before The Coronavirus

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 (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 835 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about KeyCorp (NYSE:KEY).

KeyCorp (NYSE:KEY) shareholders have witnessed an increase in support from the world’s most elite money managers lately. KEY was in 36 hedge funds’ portfolios at the end of December. There were 30 hedge funds in our database with KEY positions at the end of the previous quarter. Our calculations also showed that KEY isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).

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 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 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 stocks that are in our short portfolio.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment 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 take a glance at the fresh hedge fund action surrounding KeyCorp (NYSE:KEY).

How are hedge funds trading KeyCorp (NYSE:KEY)?

At the end of the fourth quarter, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the third quarter of 2019. By comparison, 33 hedge funds held shares or bullish call options in KEY a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

The largest stake in KeyCorp (NYSE:KEY) was held by Citadel Investment Group, which reported holding $282.4 million worth of stock at the end of September. It was followed by Pzena Investment Management with a $161.9 million position. Other investors bullish on the company included Millennium Management, Adage Capital Management, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Elizabeth Park Capital Management allocated the biggest weight to KeyCorp (NYSE:KEY), around 3.73% of its 13F portfolio. Azora Capital is also relatively very bullish on the stock, setting aside 3.55 percent of its 13F equity portfolio to KEY.

Now, key hedge funds were breaking ground themselves. Azora Capital, managed by Ravi Chopra, created the biggest position in KeyCorp (NYSE:KEY). Azora Capital had $25 million invested in the company at the end of the quarter. Fred Cummings’s Elizabeth Park Capital Management also initiated a $9.5 million position during the quarter. The other funds with new positions in the stock are Ray Dalio’s Bridgewater Associates, Ran Pang’s Quantamental Technologies, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as KeyCorp (NYSE:KEY) but similarly valued. We will take a look at Essex Property Trust Inc (NYSE:ESS), Rogers Communications Inc. (NYSE:RCI), First Republic Bank (NYSE:FRC), and Imperial Oil Limited (NYSE:IMO). This group of stocks’ market values resemble KEY’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ESS 33 568820 14
RCI 13 313836 -10
FRC 27 939192 7
IMO 10 35415 -2
Average 20.75 464316 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $464 million. That figure was $778 million in KEY’s case. Essex Property Trust Inc (NYSE:ESS) is the most popular stock in this table. On the other hand Imperial Oil Limited (NYSE:IMO) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks KeyCorp (NYSE:KEY) is more popular among hedge funds. 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 22.3% in 2020 through March 16th and still beat the market by 3.2 percentage points. Unfortunately KEY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KEY were disappointed as the stock returned -50.1% during the first two and a half months of 2020 (through March 16th) 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 most of these stocks already outperformed the market in Q1.

5 Most Popular Stocks Among Hedge Funds
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.

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