Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like KeyCorp (NYSE:KEY).
KeyCorp (NYSE:KEY) was in 28 hedge funds' portfolios at the end of September. KEY has experienced a decrease in support from the world's most elite money managers in recent months. There were 31 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 Q3 rankings and see the video below for Q2 rankings). Video: Click the image to 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_255014" align="aligncenter" width="450"] Clint Carlson of Carlson Capital[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's go over the key hedge fund action encompassing KeyCorp (NYSE:KEY).
What does smart money think about KeyCorp (NYSE:KEY)?
At Q3's end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. On the other hand, there were a total of 41 hedge funds with a bullish position in KEY a year ago. With the smart money's capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
More specifically, Citadel Investment Group was the largest shareholder of KeyCorp (NYSE:KEY), with a stake worth $133.5 million reported as of the end of September. Trailing Citadel Investment Group was Pzena Investment Management, which amassed a stake valued at $123.8 million. Millennium Management, Carlson Capital, and Balyasny Asset 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 Prospector Partners allocated the biggest weight to KeyCorp (NYSE:KEY), around 1.43% of its portfolio. Carlson Capital is also relatively very bullish on the stock, dishing out 1.4 percent of its 13F equity portfolio to KEY.
Because KeyCorp (NYSE:KEY) has experienced falling interest from the entirety of the hedge funds we track, logic holds that there exists a select few fund managers who sold off their full holdings in the third quarter. Interestingly, Ravi Chopra's Azora Capital cut the biggest investment of the "upper crust" of funds followed by Insider Monkey, comprising close to $47.7 million in stock. Sander Gerber's fund, Hudson Bay Capital Management, also sold off its stock, about $7.5 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds in the third quarter.
Let's check out hedge fund activity in other stocks similar to KeyCorp (NYSE:KEY). We will take a look at Centene Corp (NYSE:CNC), Splunk Inc (NASDAQ:SPLK), CDW Corporation (NASDAQ:CDW), and CBRE Group, Inc. (NYSE:CBRE). This group of stocks' market values are similar to KEY's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CNC,55,2034586,-10 SPLK,32,168599,7 CDW,26,1168154,-3 CBRE,27,1095686,2 Average,35,1116756,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 35 hedge funds with bullish positions and the average amount invested in these stocks was $1117 million. That figure was $671 million in KEY's case. Centene Corp (NYSE:CNC) is the most popular stock in this table. On the other hand CDW Corporation (NASDAQ:CDW) is the least popular one with only 26 bullish hedge fund positions. KeyCorp (NYSE:KEY) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on KEY, though not to the same extent, as the stock returned 8.7% during the first two months of the fourth quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.