Were These Hedge Funds Right About KeyCorp (KEY)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding KeyCorp (NYSE:KEY).

KeyCorp (NYSE:KEY) shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. KeyCorp (NYSE:KEY) was in 37 hedge funds’ portfolios at the end of June. The all time high for this statistics is 46. There were 43 hedge funds in our database with KEY holdings at the end of March. Our calculations also showed that KEY isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s go over the recent hedge fund action regarding KeyCorp (NYSE:KEY).

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

At Q2’s end, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the previous quarter. On the other hand, there were a total of 31 hedge funds with a bullish position in KEY a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Pzena Investment Management held the most valuable stake in KeyCorp (NYSE:KEY), which was worth $68.1 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $47 million worth of shares. Balyasny Asset Management, Citadel Investment Group, and Sirios Capital Management 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 Elizabeth Park Capital Management allocated the biggest weight to KeyCorp (NYSE:KEY), around 3.8% of its 13F portfolio. Sirios Capital Management is also relatively very bullish on the stock, dishing out 1.22 percent of its 13F equity portfolio to KEY.

Judging by the fact that KeyCorp (NYSE:KEY) has experienced a decline in interest from the smart money, logic holds that there were a few money managers that decided to sell off their entire stakes in the second quarter. Interestingly, Clint Carlson’s Carlson Capital cut the biggest position of the 750 funds monitored by Insider Monkey, worth close to $35.3 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also dumped its stock, about $7.6 million worth. These transactions are interesting, as total hedge fund interest fell by 6 funds in the second quarter.

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 POSCO (NYSE:PKX), NICE Ltd (NASDAQ:NICE), Imperial Oil Limited (NYSE:IMO), ArcelorMittal (NYSE:MT), Ingersoll Rand Inc. (NYSE:IR), Omnicom Group Inc. (NYSE:OMC), and Xylem Inc (NYSE:XYL). This group of stocks’ market caps are closest to KEY’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PKX 10 49629 -1
NICE 19 489930 -3
IMO 11 21537 -2
MT 19 266529 6
IR 31 407546 -2
OMC 31 588433 0
XYL 22 504853 -5
Average 20.4 332637 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.4 hedge funds with bullish positions and the average amount invested in these stocks was $333 million. That figure was $213 million in KEY’s case. Ingersoll Rand Inc. (NYSE:IR) is the most popular stock in this table. On the other hand POSCO (NYSE:PKX) 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 overall hedge fund sentiment score for KEY is 73.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and still managed to beat the market by 20.1 percentage points. Hedge funds were also right about betting on KEY, though not to the same extent, as the stock returned 8.1% since the end of June (through October 30th) and outperformed the market as well.

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