Hedge Funds Cashing Out Of KeyCorp (KEY)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded KeyCorp (NYSE:KEY) and determine whether the smart money was really smart about this stock.

Is KeyCorp (NYSE:KEY) a healthy stock for your portfolio? Prominent investors were reducing their bets on the stock. The number of long hedge fund positions shrunk by 6 in recent months. KeyCorp (NYSE:KEY) was in 37 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 46. 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 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 58 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.

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let’s analyze the latest hedge fund action regarding KeyCorp (NYSE:KEY).

What does smart money think about KeyCorp (NYSE:KEY)?

At the end of June, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards KEY over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

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, earmarking 1.22 percent of its 13F equity portfolio to KEY.

Because KeyCorp (NYSE:KEY) has experienced bearish sentiment from the smart money, logic holds that there lies a certain “tier” of money managers that slashed their positions entirely by the end of the second quarter. At the top of the heap, Clint Carlson’s Carlson Capital cut the largest investment of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $35.3 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund said goodbye to about $7.6 million worth. These transactions are important to note, as total hedge fund interest dropped by 6 funds by the end of the second quarter.

Let’s now review hedge fund activity in other stocks similar to KeyCorp (NYSE:KEY). 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 values match KEY’s market value.

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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Unfortunately KEY wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KEY were disappointed as the stock returned 2.6% since the end of the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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