Will the 'spark' of reopening stocks go out... Profits decline while short selling accumulates

Rise Not Based on Fundamentals... High Short Selling Ratio Calls for Caution

On the 14th, as the spread of COVID-19 continued, people were lining up at the temporary screening clinic in Seoul Plaza. Photo by Mun Ho-nam munonam@

[Asia Economy Reporters Seon-ae Lee and Myunghwan Lee] There are concerns that the recent rally in 'reopening stocks'?which had been gaining momentum amid expectations of a recovery in everyday consumption due to increased vaccination rates?may be premature. Rather than optimism, there is growing apprehension. Analysts in the securities industry point out that the upward trend is driven more by expectations than fundamentals, and the rising number of COVID-19 cases remains a burdensome factor despite the government's potential easing of quarantine regulations. Moreover, the recent high short-selling activity and outstanding short positions in reopening stocks have raised calls for lowering expectations.

According to financial information provider FnGuide as of the third week of February, hotel and leisure sectors were identified as overvalued industries with downwardly revised earnings forecasts compared to the KOSPI. This indicates that these sectors have experienced high stock price increases over the past month. Cosmetics, apparel, and essential consumer goods sectors also showed high stock price gains. Among the top stocks with downward revisions in annual operating profit consensus (targeting companies with a market capitalization of over 500 billion KRW and at least three EPS estimates), representative reopening stocks such as Paradise and Lotte Hi-Mart were included. Their operating profit forecasts for this year decreased by 11.7% and 9.6%, respectively, compared to a week ago.

The downward revision of operating profit forecasts for domestic listed companies this year also dampens expectations for economic activity resumption. Based on 236 companies with consensus estimates, operating profit forecasts for this year were adjusted downward by 0.6% compared to last week, totaling 225.5 trillion KRW.

Although the effectiveness of social distancing measures has diminished due to the spread of the Omicron variant, raising the possibility of easing quarantine rules, the surge in confirmed cases and the increase in critically ill patients and deaths are delaying economic reopening and negatively impacting investor sentiment.

Furthermore, experts caution that the recent rise in reopening stocks has largely been driven by expectations of a transition to 'With Corona' and the easing of quarantine systems, rather than solid fundamentals. Choi Go-woon, a researcher at Korea Investment & Securities, said, "Since the Lunar New Year holiday, airline stocks among reopening sectors have rebounded significantly, but for domestic low-cost carriers (LCCs), concerns about additional capital erosion outweigh reopening recovery." He advised, "Investors should be cautious as airline stocks are moving well on expectations alone, and the rebound is not supported by fundamentals."

There is also a lag period before earnings improvements materialize. Seol Tae-hyun, a researcher at DB Financial Investment, predicted, "Since there is a time lag before earnings improve, the momentum of reopening stocks is likely to be limited."

Attention should also be paid to the high volume of short-selling transactions and the accumulation of short positions. Considering the nature of short selling?borrowing stocks to sell, then repurchasing them at a lower price to return and profit?this suggests a potential decline in reopening stocks. Being targeted by short sellers implies that expectations for a return to normalcy are weaker than anticipated, and that recovery to pre-COVID-19 fundamentals (earnings) is expected to be difficult.

As of the market close on the 10th, 10 of the top 50 stocks with the highest short-selling volume were classified as reopening stocks. Dongwon F&B (35.16%), Hotel Shilla (32.19%), and CJ CGV (28.67%) saw active short-selling transactions. Other stocks with high short-selling volumes included Lotte Shopping (27.99%), Hanjin KAL (24.96%), HYBE (21.64%), LG Household & Health Care (21.28%), Krafton (18.62%), Netmarble (18.50%), Amorepacific (16.63%), E-Mart (14.05%), and Nongshim (10.81%). In the KOSDAQ market, CJ ENM, a representative reopening stock, had the highest short-selling ratio at 34.55% among all stocks.

Reopening stocks also ranked high in short-selling outstanding positions. Tourism-related reopening stocks took the top two spots in overall short-selling outstanding positions: Lotte Tour Development at 8.06% and Hotel Shilla at 7.10%. Others included GKL (2.94%), Amorepacific (2.86%), Krafton (2.74%), CJ CGV (2.67%), and LG Household & Health Care (1.41%). In the KOSDAQ market, SM Entertainment ranked sixth with a short-selling outstanding position ratio of 4.68%.

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