Value Stocks or Growth Stocks? Amid Controversy, "Let's Start by Selling Off Institutional Empty Houses with Earnings Improvement"

Stocks with No Burden from Institutional Over-Selling, 'Optimal Investment' with Earnings Upgrade Combination

[Asia Economy Reporter Lee Seon-ae] Investors are increasingly conflicted as opinions clash over whether growth stocks will once again lead the market or if there is a need to increase the proportion of value stocks in a market dominated by value stocks.

On the 17th, Hana Financial Investment highlighted top stocks based on a combination of ‘earnings momentum (performance)’ and ‘institutional 1-year supply vacancy (top net selling intensity over 1 year)’. As the Q1 earnings season (April to June) approaches, earnings momentum becomes important, and combining this with a technical indicator, ‘institutional supply vacancy’, is considered the optimal investment alternative.

Researcher Lee Kyung-soo of Hana Financial Investment explained, "Since 2016, monthly rebalancing (equal-weighted long-short of top and bottom 20%) combining ‘1-month earnings upgrade’ and ‘3-month excessive price decline’ showed a 72% return to date, while the combination of ‘1-month earnings upgrade’ and ‘1-year institutional supply vacancy’ yielded 67%. However, changing the criteria from last year, the combination of ‘earnings momentum + institutional 1-year supply vacancy’ achieved 48%, significantly outperforming the 10% return of ‘earnings momentum + 3-month excessive decline’."

Ultimately, the analysis suggests that stocks relatively oversold and less burdensome amid continuous institutional selling of domestic stocks may have an advantage. Generally, such stocks are in a ‘vacant house’ state, which helps them withstand downturns well.

Institutions have continued their selling streak this year. As of the day before, the total net selling amount by institutions reached KRW 31.1481 trillion. The net selling amount over one year (March 16, 2020 to March 16, 2021) was KRW 64.6506 trillion. The stocks most heavily net sold by institutions during this period were Samsung Electronics, LG Chem, NAVER, Kakao, Hyundai Motor, Samsung Electronics Preferred, SK Hynix, Celltrion, Samsung SDI, SK, Celltrion Healthcare, SK Innovation, KT&G, Samsung C&T, Hyundai Mobis, Korea Electric Power Corporation, SK Chemicals, and others in that order.

However, this reflects mechanical net selling characteristics through strategic asset allocation (SAA). Since selling occurs regardless of fundamentals or earnings, if overselling happens, the vacant house clearing strategy becomes clearer. Institutions, who always keep in mind the gap between stock price and performance, tend to net buy stocks with strong earnings after overselling.

Lee said, "From a seasonality perspective, institutional vacant house stocks do not particularly show high performance in Q2, but they are good to use alongside earnings momentum before and after the earnings season." He recommended stocks such as Shinsegae, Kiwoom Securities, Poongsan, Hyosung TNC, Kolon Industries, Maeil Dairies, Hyundai Home Shopping, KG Inicis, GS, Korean Reinsurance, SK Gas, and SL as top picks when considering valuation indicators.

Recently, the securities industry has been debating growth stocks versus value stocks. Researcher Lee Jin-woo of Meritz Securities forecasted growth stock strength, stating, "Interest rate changes do not create a new trend but rather accelerate differentiation among growth companies." He advised investing in industry-leading stocks rather than rotating into value stocks. Jo Ik-jae, senior advisor at Hi Investment & Securities, said, "Considering interest rate trends, we believe earnings improvement stocks and growth stocks should be increased from mid-Q2," adding, "Given the global growth stock strength, semiconductors and IT software sectors are expected to outperform the market."

Conversely, advice to increase the proportion of value stocks has surged, considering that since mid-February, value stocks’ price increases have surpassed those of growth stocks. In fact, the banking sector rose 8.99% this month, recording the highest increase. Following were value sectors such as insurance (7.31%), machinery (7.08%), steel and metals (6.46%), and construction (5.19%), all showing strong upward trends.

Researcher Park Seung-young of Hanwha Investment & Securities said, "It is time to adjust the proportion of value stocks," adding, "If interest rates rise further, funds are likely to move from the entire growth stock sector to the entire value stock sector." KB Securities researcher Lee Eun-taek also forecasted a market trend favoring value stocks over the next two months. He said, "Growth stocks may surge temporarily as interest rates pause, but the medium-term trend favors rising interest rates," adding, "The environment for growth stocks in the first half of the year is not very favorable."

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