Short Selling Resumption Countdown... "Beware of Stocks with Rapid Increase in Loan Balance, Poor Earnings, and Downgraded Forecasts"

Recent One-Month Surge in Short Selling Balances for Kakao and Others
Significant Impact from Short Selling on Underperforming Stocks

[Asia Economy Reporter Lee Seon-ae] The short-selling ban, which was the third to be imposed on the Korean stock market and lasted for a record-long period of 14 months, is scheduled to resume on the 3rd, raising tension among individual investors. Experts give high marks for the positive effects such as reduced volatility in the domestic stock market but advise caution for certain stocks. The stocks they warn about are those with a recent sharp increase in loan balance, poor earnings, or downward revisions in earnings forecasts.

According to Koscom on the 27th, the KOSPI 200 stocks with the highest loan balance growth rate over the past month include Kakao (80.60%), CJ CGV (79.90%), Hyundai Heavy Industries Holdings (72.50%), Hanwha Systems (63.80%), Boryung Pharmaceutical (59.30%), and Ilyang Pharmaceutical (58.50%). Among KOSDAQ 150 stocks, the top ranks were GoYoung (84.00%), Pearl Abyss (83.90%), Seegene (70.80%), HL B Life Science (60.30%), Dawonsys (59.00%), and Korea Investors Service (52.70%).

Currently, the stocks with the highest loan balance relative to market capitalization include KMH, CJ CGV, Doosan Infracore, Hotel Shilla, Seegene, Celltrion, GS Retail, NHN Korea Cyber Payment, JYP Entertainment, LG Display, Patron, HMM, Netmarble, Korea Kolmar, AfreecaTV, Samsung Heavy Industries, LG Chem, Kakao Games, Hana Tour, and LG Innotek.

Of course, an increase in loan balance does not necessarily lead to short selling. Some of these stocks have issued convertible bonds (CB) or bonds with warrants (BW), and using short selling can secure profits, so it is highly likely that volumes will be released when short selling resumes. However, arbitrage trading using CB or BW is already fully known to the market. If the current stock price is lower than the conversion price, conversion is meaningless, so short selling will not occur. Also, if the stock price rises above the conversion price, demand for short selling increases, making it difficult to secure loan volumes, which inevitably raises loan costs. Therefore, the increase in loan balance for these stocks is reasonably seen as a move to secure volumes in advance.

Researcher Kim Kwang-hyun of Yuanta Securities said, "An increase in loan balance does not necessarily mean volumes will be released for short selling, and short selling is not a trade conducted based on predicting a decline, so short selling does not proceed just because the stock price has risen significantly." He advised, "Rather, caution is needed for stocks expected to have poor earnings." This is because if stocks expected to have poor first-quarter earnings perform worse than expected, or if stocks whose prices rose due to expectations of good earnings fall short of forecasts, a valuation reassessment of the previous rise is expected.

Yuanta Securities identified stocks that may show notable first-quarter earnings weakness as CJ CGV, J Contentree, GKL, Korea Electric Power Corporation, Hyundai Wia, Korea Aerospace Industries, SFA, Innocean, Com2uS, Hanmi Pharmaceutical, and Pearl Abyss. Stocks that could see market expectations collapse if actual results fall short of forecasts include HMM, Silicon Works, Hyundai Construction Equipment, AfreecaTV, Kakao, Daehan Petrochemical, Poongsan, and Hyundai Electric. Researcher Jeon Gyun of Samsung Securities explained, "Generally, foreign and institutional investors' short-selling trades target stocks with high valuation burdens where mean reversion is expected."

Meanwhile, the resumption of short selling is widely seen as positive for the overall stock market. It is judged that the abnormal supply and demand that appeared during the unprecedentedly long short-selling ban, which excessively increased index volatility, will disappear and a stable upward trend will be seen. Researcher Kim emphasized, "Foreigners' hedging means were limited to futures selling, which prolonged abnormal backwardation (a phenomenon where futures prices are lower than spot prices), encouraged arbitrage trading, and increased KOSPI volatility. If short selling resumes, backwardation will disappear and the index will regain a stable trend." Researcher Yeom Dong-chan of Ebest Investment & Securities predicted, "If short selling is possible, hedging is possible, which can reduce volatility, so foreigners will turn to net buying."

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