Jim Cramer Says Scotiabank’s Investment Gives KeyCorp (KEY) a ‘Nice Reset Opportunity’
We recently compiled a list of the Jim Cramer's Exclusive List of 9 YEV Stocks. In this article, we are going to take a look at where KeyCorp (NYSE:KEY) stands against the other YEV stocks in Jim Cramer's exclusive list.
Recently, Jim Cramer sifted through the S&P 500 to identify stocks that satisfy his criteria: yield, earnings growth, and value. He explained the need behind the criteria:
“In a market with huge year-to-date gains, you got to get a little more selective about what you buy. Which is why I created this three-part test, also known as tripartite test.”
To navigate this market, he developed a three-part evaluation framework, which he refers to as the YEV test. Cramer explained that the first criterion focuses on yield, specifically seeking stocks that offer better returns than the current yield on the 10-year Treasury, which sits slightly above 4%. The second criterion is outsized earnings growth, meaning he looks for companies expected to exceed the 14% growth forecast for the S&P 500 next year. Lastly, Cramer seeks value, targeting stocks priced lower than the S&P 500, which currently trades at around 21 times next year’s earnings estimates.
“We want stocks with higher yields than the 10-year Treasury, meaning 4% plus. We want faster earnings growth than the S&P 500. In the aggregate, that's faster than 14%. And we want a price-earnings multiple lower than that of the overall S&P 500, which trades at 21 times next year’s earnings, which everybody says is a little elevated.”
While Cramer acknowledged that his criteria was challenging to meet, he successfully identified nine stocks that fit the YEV model. He noted that although the Federal Reserve has created a favorable environment for investors, resulting in substantial market gains, it is crucial to exercise caution when selecting stocks.
Observing the historical trends, Cramer pointed out that October has generally been a strong month for the market, yet he reiterated the necessity of being discerning in purchases. He encouraged viewers to consider these nine stocks as the top tier within the market. He went on to emphasize:
“Now, I want you to think of them as the elite of the elite. Not many companies can give you high yields, cheap stocks, and explosive earnings growth all at the same time... Here's the bottom line: in a market like this one, you do need to be selective, which is why we've fallen back on yield, on earnings and on growth and on value. Okay, now these are all things that are very hard to find right now.”
Our Methodology
For this article, we compiled a list of 9 stocks that fit Jim Cramer’s YEV stocks criteria and were unveiled during his episodes of Mad Money from October 7 to October 10. We listed the stocks in ascending order of their hedge fund sentiment as of the second quarter, which was taken from Insider Monkey’s database of more than 900 hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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KeyCorp (NYSE:KEY)
Number of Hedge Fund Holders: 38
Cramer views KeyCorp (NYSE:KEY) favorably, labeling it a reliable operator. He pointed out that the stock is approaching the values it had prior to the collapse of Silicon Valley Bank last spring. Here’s what Mad Money’s host had to say:
“The regional banks got squashed when the Fed rapidly raised interest rates, then decided to leave short rates higher for longer. But now that the Fed's in rate-cut mode… We know that's going to happen, they stand to benefit even if the pace of the cut slows down. In fact, we're in a terrific scenario for these guys.
First is KeyCorp. This is a Cleveland-based, parent of KeyBank. It's a high-quality consumer and commercial bank franchise with a sneakily large reach. They've got roughly 1000 branches across 15 states, Midwest, Northeast, Northwest. Unfortunately, KeyCorp made some mistakes with its bond portfolio that severely damaged its earnings power when bond yields soared and bond prices got clobbered. Now, if the Fed is our friend, that won't be a problem anymore.”
Cramer mentioned that a couple of months ago, Scotiabank announced a significant investment for nearly a 15% stake in KeyCorp, which will occur in three tranches, with the first tranche completed and the remaining two contingent on regulatory approval.
“Plus, a couple of months ago, we learned that the Bank of Nova Scotia, also known as Scotiabank, will be paying $2.8 billion to take a nearly 15% stake in KeyCorp. Oh, man. It's a complex transaction, which will take place in three tranches. The first tranche has happened and the other two will come over time after the deal gets regulatory approval. But what matters is Scotiabank’s investment gives KeyCorp a much better capital cushion that it can use to reposition its investment portfolio. I think this is a nice reset opportunity for KeyCorp. And I'd be buying it right along the side of the Canadians, especially since the stock currently yields nearly 5%. In fact, with KeyCorp trading at $16 and change, you know, you're actually getting a slightly better price than the $17.17 per share Scotiabank's paying for its stake. That sounds good to me.”
KeyCorp (NYSE:KEY) serves as the holding company for the KeyBank National Association, delivering a wide range of retail and commercial banking services throughout the United States. On October 2, Evercore ISI analyst John Pancari raised the price target on the stock to $20 from $18.50 and kept an Outperform rating.
Pancari noted that the upcoming third-quarter results for regional banks are expected to reflect a continued fundamental improvement that began to emerge in the previous quarter. He believes that the downward revisions in earnings per share estimates, influenced by a lower interest rate environment and declining loan trends, will help stabilize expectations for sector earnings.
KeyCorp (NYSE:KEY) reported a net income from continuing operations of $237 million for the second quarter of 2024, translating to $0.25 per diluted common share. This figure is an increase from the first quarter of 2024, which saw a net income of $183 million, or $0.20 per diluted common share, but represents a decline compared to the $250 million, or $0.27 per diluted common share, recorded in the second quarter of 2023.
Overall KEY ranks 5th on Jim Cramer's exclusive list of YEV stocks. While we acknowledge the potential of KEY as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KEY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.