[Good Morning Stock Market] "Earnings Downgrades and Overvalued Stocks Within Sectors Are Short Selling Targets"

Widening Return Gaps by Stock After Short Selling Resumption
Stocks with Strong Institutional Net Buying Likely to Face Short Selling

"Focus on Undervalued Stocks with Significant Profit Improvement"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] With the resumption of short selling scheduled for the 3rd of next month, investors are busy sorting out the wheat from the chaff among individual stocks. The securities industry suggests that stocks with limited earnings growth and those that have been overvalued within their sectors could become targets of short selling. Furthermore, stocks with strong net buying intensity by institutions are also advised to have a high possibility of being shorted.

◆ Kyungsoo Lee, Researcher at Hana Financial Investment: While the impact of short selling resumption on the index level is expected to be limited, it will likely play a role in distinguishing stocks based on fundamentals and valuation criteria. When short selling was banned, everyone could rise, but after its resumption, the performance gap between stocks may widen. Moreover, since most domestic companies are expected to report solid earnings through the first and second quarters of this year, undervaluation and whether there is a new upward revision in earnings will be the key factors distinguishing long and short positions in short selling, rather than simple earnings variables.

Besides corporate fundamental variables, institutional demand and supply are also important. Short selling is closely related to the net buying intensity of institutions. Analyzing the monthly time series of short selling and the one-year net buying intensity by institutions for individual stocks in the KRX300 from 2016 to the present shows that, for most periods, the rankings of short selling intensity and institutional net buying intensity followed similar trends. This means that stocks with strong institutional net buying intensity saw an increase in short selling.

In conclusion, it is necessary to check institutional demand and supply and valuation for KOSPI 200 and KOSDAQ 150 stocks. Excessive figures could make stocks targets for short selling. Strategically, it seems positive to approach stocks that are not included in the KOSPI 200 and KOSDAQ 150, show undervaluation, and have little institutional demand.

◆ Jungyeon Lee, Researcher at Meritz Securities: So far, 43% of stocks by market capitalization have reported earnings. Sales and operating profit exceeded expectations by 5.5% and 11.8%, respectively, continuing a positive trend. Considering that the market's average earnings beat rate during the first quarter over the past five years was 1.2%, this is a very high level.

Among those that have reported earnings so far, except for the automobile sector, semiconductor, banking, steel, and IT home appliance sectors all posted solid results. In the steel sector, POSCO announced its highest operating profit in 10 years, exceeding expectations by more than 20%. According to securities industry forecasts, except for some sectors such as utilities, software, and essential consumer goods, most sectors are expected to show significant upward revisions. In this phase where most stocks and sectors show profit growth, an environment favorable to stocks with undervaluation merits is expected to be created.

The strategy of investing in stocks with significant profit improvement but undervalued within their sectors is expected to yield clear results even after the resumption of short selling. After short selling resumes, short betting will become possible on stocks that were overvalued despite fundamental weaknesses, leading to an influx of selling pressure.

◆ Gong Dongrak, Researcher at Daishin Securities: Korea's first-quarter GDP growth rate exceeded expectations as private consumption, which had been sluggish, improved significantly along with exports. The Bank of Korea announced yesterday that Korea's GDP grew by 1.6% quarter-on-quarter in the first quarter, significantly surpassing the market expectation of 1.3%. Private consumption turned upward in the first quarter after weakness in the fourth quarter. Non-durable goods such as passenger cars, home appliances, durable goods, and food and beverages increased significantly by 1.1%. Facility investment, construction investment, exports, and imports all rose sharply compared to the previous quarter.

Accordingly, the annual growth rate for this year, previously expected to be in the mid-3% range, is likely to be revised upward. Even reflecting only the first-quarter figures, there is an upward revision factor of about 0.2 percentage points in the growth forecast. Considering that exports continue to increase reflecting improvements in global trade, the growth forecast to be presented later is expected to reach the mid-to-high 3% range.

Meanwhile, the U.S. stock market fell slightly yesterday as some profit-taking occurred following earnings announcements by certain companies. This is interpreted as a cautious stance ahead of earnings announcements by major tech stocks. The Nasdaq index fell about 0.34% as Treasury yields rose slightly, while the Dow Jones Industrial Average rose 0.01% due to strength in consumer goods and financial stocks.

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