Another Misguided 'Buy' Recommendation... More Than Half Plummet

53% of Stocks Changing from Neutral to Buy in Last 3 Months Declined
Hyundai Rotem Drops 18.4%, Largest Fall...Most Suggested Before Market Correction
Limitations in Brokerage Fee Revenue Structure and Forecasts...Investors Should Consider Volatility Factors

[Asia Economy Reporter Minwoo Lee] It has been revealed that more than half of the stocks whose investment ratings were upgraded by securities firms over the past three months actually saw their prices fall. Despite the upward trend of both the KOSPI and KOSDAQ indices, some stocks dropped by more than 18%. Given the expected continued market volatility, it is pointed out that investors need to carefully consider various factors that could affect stock prices when making investment decisions.

According to the financial investment industry on the 22nd, among 15 stocks whose investment ratings were upgraded by securities firms in the past three months, 8 (53%) actually experienced price declines. All 15 stocks had their ratings changed from neutral to buy, making the recommendation to 'buy' seem ineffective.

The stock with the largest decline was Hyundai Rotem. On April 27, when the investment rating was upgraded, the closing price was 17,950 KRW, but by the 19th of this month, the closing price had fallen to 14,650 KRW, a drop of 18.4%. Although the rating was changed from 'neutral' to 'buy' and the target price was raised from 13,000 KRW to 20,000 KRW, the stock price briefly rose to 19,450 KRW the next day on the 28th before heading downward. Kangwon Land also saw a similar situation after its rating was upgraded to buy with a target price of 31,000 KRW on the 20th of last month. After reaching 26,700 KRW on the 27th, the stock price continued to decline for three weeks. The closing price on the 19th was 22,450 KRW, down 9.6% from the time of the buy recommendation. Other stocks that fell include Cosmax (-7.9%), Samsung Heavy Industries (-7.1%), BGF Retail (-5.7%), AmoreG (-3.9%), and Poongsan (-2.7%).

Notably, 75% (6 stocks) of these buy recommendations were made before the market correction began earlier this month. The KOSPI index had plunged to 1,439.43 on March 19, reaching levels not seen in 11 years. It then steadily rose to 2,217.21 by the 8th of this month. Despite a strong rebound so powerful that it was said "you could buy with your eyes closed and still make money," the prices of three out of four stocks recommended for purchase actually fell. This has led to criticism that the buy recommendations were excessive.

This is not the first time such criticism has been raised. According to data submitted by the Financial Supervisory Service to Democratic Party lawmaker Byungwook Kim in the first quarter of this year, 30 out of 32 domestic securities firms did not issue any 'sell' recommendations in their reports. Five firms?Heungkuk Securities (61 cases), DS Investment & Securities (28 cases), Leading Investment & Securities (10 cases), Yuhwa Securities (4 cases), and Hanyang Securities (2 cases)?issued 100% 'buy' recommendations without any 'sell' or even 'neutral' opinions during this period. Despite the collapse of the KOSPI below 1,500 due to the COVID-19 pandemic, they continued to encourage buying stocks without issuing sell recommendations. This has drawn criticism for exposing the structural limitation of securities firms, whose commission revenues increase with higher trading volumes regardless of individual stock price movements. Since several sectors sensitive to economic slowdowns caused by COVID-19, such as cosmetics, convenience stores, and casinos, were included, there are also opinions that the accuracy of predictions has its limits.

There were also stocks whose prices rose following buy recommendations. For example, DB Insurance’s closing price was 37,600 KRW when its investment rating was upgraded to buy on April 20, and it rose 17.6% to 44,200 KRW by the 19th. On the 10th, it reached 48,850 KRW, surpassing the target price of 47,000 KRW set at that time. However, the average increase rate of stocks that rose was 6.8%, which did not exceed the average decline rate of 8% for stocks that fell.

A financial investment industry official said, "The profit structure of securities firms is problematic, and above all, since this is a matter of prediction, there are limits to accuracy," adding, "Various factors included in investment reports can change depending on external circumstances, so investors should carefully examine the variables before investing."

This content was produced with the assistance of AI translation services.