Significant Increase in Performance Improvement Stocks in Q1, What Are the Response Strategies?

[Asia Economy Reporter Song Hwajeong] As the stock market correction continues, interest in first-quarter earnings this year is growing. Due to the base effect of COVID-19, overall first-quarter corporate earnings are expected to improve significantly, and among these, attention should be paid to undervalued stocks.

According to financial information provider FnGuide on the 24th, the market consensus for KOSPI operating profit in the first quarter is expected to increase by 78.94% year-on-year to 41.9297 trillion KRW.

The earnings peak this year is expected to be in the first quarter. Lee Kyungsoo, a researcher at Hana Financial Investment, said, "The increase in domestic corporate profits, which showed a turnaround from the third quarter of last year, will peak in the first quarter," adding, "From the second quarter, the growth rate will slow down somewhat, and the index rise speed will also slow."

Although earnings forecasts maintain an upward trend, the pace has slowed, and valuation pressure continues. Kim Jiyoon, a researcher at Daishin Securities, said, "The KOSPI first-quarter and full-year operating profit consensus has been revised upward by 0.3% and 0.4%, respectively, over the past month," adding, "As stock prices have risen faster than earnings forecasts, valuation pressure continues." Currently, the KOSPI 12-month forward price-to-earnings ratio (PER) stands at 13.1 times, exceeding the peak level just before the 2008 financial crisis.

Given the high valuation, whether earnings meet market expectations will be important. Researcher Kim said, "Historically, the period when the KOSPI index surpassed its historical high and reached a new peak coincides with the time when corporate earnings fell short of consensus, marking the end of the price rise phase and the start of a decline." He added, "If first-quarter earnings meet or exceed expectations, the recently slowed pace of earnings forecast increases could accelerate again, but if they fall significantly short of consensus, valuation pressure will be highlighted and could act as a factor increasing stock price volatility."

As first-quarter earnings improvement stocks are expected to pour out, attention should be paid to stocks differentiated through undervaluation. When earnings are poor, there are few earnings improvement stocks, so scarce earnings stocks receive a premium, making the PER variable less meaningful. However, in periods of generally good earnings, the variable of relative undervaluation inevitably has a greater impact on stock prices. The researcher explained, "Since the overall market profit growth rate is large in the first quarter this year, not only the amount of profit but also the number of companies with increasing profits is very large," adding, "As alternatives increase, while earnings remain important, a low valuation indicator relative to high earnings becomes more important." Hana Financial Investment cited sectors showing both undervaluation and first-quarter earnings growth rate and full-year PER basis as banks, non-ferrous metals, automobiles, steel, distribution, textiles and apparel, chemicals, electrical equipment, technology hardware, semiconductors, and utilities.

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