[Good Morning Stock Market] "New Earnings Stocks Are More Advantageous Than Existing Earnings Stocks at Year-End"

[Asia Economy Reporter Eunmo Koo] Analysis suggests that new earnings stocks are more advantageous than existing earnings stocks at the end of the year. Additionally, as earnings upgrades become more common, it is advised to start paying attention to low price-to-earnings ratio (PER) styles next year as well.

◆Kyungsoo Lee, Researcher at Hana Financial Investment=At the end of the year, new earnings stocks outperform existing earnings stocks in terms of performance. This is because, from a year-end seasonal perspective, stocks that have risen less this year have performed better, and there is high demand for new stocks expected to turn around looking toward next year. In fact, seasonality shows that the performance of new earnings stocks increases as the year-end approaches. Ultimately, it is a time when research is needed on stocks that can expect earnings surprises due to sharp upward revisions in this third quarter’s earnings in the short term, and stocks whose earnings for next year are beginning to be revised upward in the long term. Earnings surprises are expected in the third quarter from companies such as LG Display, Kia Motors, Hyundai Motor, POSCO, Green Cross, Hyundai Mobis, Hanon Systems, SK Telecom, Lotte Shopping, Kumho Petrochemical, Chong Kun Dang, LG Household & Health Care, Youngone Corporation, Samsung Electro-Mechanics, Mando, Hansae Co., Seegene, and KT&G.

Not only at the end of this year but also next year, a strong performance of low price-to-earnings ratio (PER) styles is anticipated. Everyone is likely aware that undervalued stocks (value stocks) are advantageous from a year-end seasonal perspective. The basis for judging that the strength of low PER styles can continue into next year is that next year’s earnings are expected to be a turnaround year, similar to the turnaround observed in 2014?2015, when undervalued stock groups also experienced a turnaround. This is a key market tendency that has recently appeared. When earnings improve and the market PER falls, relatively cheaper stocks perform better. As a moderate economic recovery occurs and interest rates rise, this environment favors value stocks. At the point of earnings turnaround, earnings become somewhat common. Ultimately, valuation becomes the key variable.

◆Sangho Kim, Researcher at Shinhan Financial Investment=The third-quarter earnings season began on the 8th with Samsung Electronics and LG Electronics. Samsung Electronics and LG Electronics recorded operating profits of 12.3 trillion KRW and 960 billion KRW respectively for the third quarter, significantly exceeding consensus estimates (Samsung Electronics 10.4 trillion KRW, LG Electronics 850 billion KRW) with strong results.

Other major companies will start announcing earnings from the third week of October. Reflecting the earnings of Samsung Electronics and LG Electronics, the KOSPI operating profit and net profit consensus are expected to be 41.8 trillion KRW and 27.5 trillion KRW respectively, representing increases of 23.9% and 33.0% compared to the same period last year.

The key point of this earnings season is whether domestic corporate profits have escaped the impact of the novel coronavirus infection (COVID-19). In the first half of this year, when the COVID-19 impact began, the KOSPI operating profit growth rate recorded -20% compared to the same period last year, showing sluggishness. With the COVID-19 impact expected to continue long-term, if the KOSPI third-quarter earnings meet consensus levels, it can be seen that domestic corporate profits have escaped the COVID-19 impact.

In the past, domestic operating profits for the first to third quarters were determined within a similar range. KOSPI operating profits were 54 trillion to 57 trillion KRW in the first to third quarters of 2018, and 36 trillion to 38 trillion KRW in the first to third quarters of 2019. However, this year, due to the COVID-19 impact, the first quarter was 27 trillion KRW and the second quarter 33 trillion KRW, showing a large difference, and the third quarter is expected to increase by more than 20% compared to the previous quarter.

Of course, excluding Samsung Electronics, which recorded strong results, the third-quarter KOSPI operating profit consensus is 29.4 trillion KRW, which is below the 2019 first to third quarter average operating profit (excluding Samsung Electronics) of 30.5 trillion KRW, and the quarter-on-quarter growth rate also falls to 15%. However, although only the slope of recovery has changed, it cannot be denied that a clear recovery trend is underway.

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