Earnings Season Opens... "Let's Shop for 'Surprise Earnings Companies' Amid Sector-Differentiated Market"

[Asia Economy Reporter Lee Seon-ae] The earnings season has officially begun with the preliminary first-quarter earnings announcements from Samsung Electronics and LG Electronics on the 7th. As the market continues to show stock differentiation, and domestic companies' earnings forecasts are being revised upward, it seems useful to devise investment strategies centered on companies delivering 'earnings surprises.' Securities firms expect that companies posting strong earnings will drive the stock market's rebound momentum, ultimately leading the domestic stock market into an 'earnings-driven market.'

According to FnGuide on the 8th, the first-quarter operating profit consensus for 109 KOSPI companies with estimates from three or more securities firms stands at 36.8613 trillion won, a 4.38% upward revision compared to one month ago. Compared to the beginning of the year (33.6587 trillion won), this is a 9.51% increase. Upward revisions are also being made for the second quarter, suggesting that the domestic stock market is gradually entering an earnings-driven phase.

Kim Sang-ho, a researcher at Shinhan Financial Investment, said, "The reason this earnings season is attracting more attention than others is that the stock market, which had been driven by liquidity since last year, is recently moving in line with corporate profits," adding, "Corporate profit improvements are ongoing, and the KOSPI's 12-month forward earnings per share (EPS) has more than 13% upside potential by year-end, even considering only the time-weighted effect."

This indicates an environment where corporate profit improvement is outpacing the stock market's rise, meaning the earnings-driven market is likely to continue through the end of the year. Kim noted, "As the market shifts to an earnings-driven phase, the key point to watch this earnings season is companies with earnings surprises," explaining, "Generally, companies that record earnings surprises tend to outperform the market."

The sectors showing favorable changes in first-quarter operating profit consensus are IT (display, semiconductors), materials (chemicals, steel), and finance (securities, insurance). These sectors have recorded over 5% changes in operating profit consensus over the past three months. Among these sectors, SK Hynix, LG Display, Lotte Chemical, S-Oil, POSCO, Hyundai Construction Equipment, and Kiwoom Securities were identified as top picks.

Kim Jae-eun, a researcher at NH Investment & Securities, said, "There is no bubble in the KOSPI's earnings outlook, and recent upward revisions for the second quarter suggest that earnings momentum can continue," forecasting, "The semiconductor sector is expected to lead KOSPI corporate profits this year, along with improvements in chemicals, energy, steel, and IT hardware." He mentioned that companies such as Samsung Electronics, SK Hynix in semiconductors, Hyundai Steel, LG Innotek, POSCO, Lotte Chemical, KB Financial Group, Kumho Petrochemical, Pan Ocean, SeAH Besteel, S-Oil, and LG Chem have seen meaningful upward revisions in their operating profit forecasts over the past month.

Experts recommend considering holding rather than selling stocks that posted earnings surprises in the first quarter, as their strong performance may continue throughout the year. Lee Kyung-soo, a researcher at Hana Financial Investment, said, "Among KOSPI 200 constituents over the past four years, companies that recorded earnings surprises exceeding 10% of the first-quarter consensus generated 3.4% returns in the following month and 2.5% and 2.1% returns in the second and third quarters, respectively," adding, "Investment based on earnings momentum factors typically performs best from April to June, so 'holding' rather than 'selling' is the right strategy."

Additionally, he suggested that when selecting earnings surprise stocks, combining them with institutional oversold factors is beneficial. This is based on the judgment that the institutional net selling intensity factor performs well. He said, "Quantitatively interesting stocks ahead of the first-quarter earnings are those with significant increases compared to 2019, upward revisions in first-quarter earnings suggesting surprises, and institutional overselling," citing Yuhan Corporation, HMM, Kumho Petrochemical, Hanwha Solutions, LG Chem, LG Hausys, Samsung Fire & Marine Insurance, SKC, Samsung Electronics, Samsung Electro-Mechanics, Hyundai Rotem, Poongsan, Daehan Petrochemical, and Kia as examples.

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