"Just a Touch for a Home Run... Volatile Market, Undervalued Earnings Stocks as Heroes"

[Asia Economy Reporter Lee Jung-yoon] In a highly volatile market environment marked by fears of tightening from the U.S. Federal Reserve (Fed) and concerns over Russia's invasion of Ukraine, interest is growing in stocks that combine undervaluation with earnings upgrades.

Hana Financial Investment announced on the 16th that since 2010, the long-short returns for four combinations?undervalued + earnings upgrade labeled ‘Attractive’, overvalued + earnings upgrade labeled ‘Glamour’, undervalued + earnings slowdown labeled ‘Value’, and overvalued + earnings slowdown labeled ‘Unattractive’?have been 820.1%, 89.5%, -33.8%, and -80.0%, respectively. From a medium- to long-term perspective, the combination of undervaluation and earnings upgrades has shown the greatest performance.

Researcher Lee Kyung-soo of Hana Financial Investment stated, "Undervalued stocks usually do not show low valuations suddenly but rather tend to mature over a long period due to negative factors such as industry downturns." He further evaluated that undervalued stocks receiving low valuations tend to surge strongly during periods of earnings upgrades.

The undervaluation factor, characterized by low price-to-earnings ratio (PER), was analyzed to generate greater market excess returns when combined with other factors rather than alone.

Lee explained, "From 2010 to the present, the monthly rebalancing long-short return of the low PER factor alone was about 39.3%, which does not show strong alpha as a single factor. However, when backtesting by combining the low PER factor and the 12-month expected operating profit (OP) upgrade (3 months) factor at a 50% weight each, the long-short return during the same period surged to 820.1%." He added, "During the same period, the earnings upgrade (3 months) factor alone achieved a return of 351.1%, which is higher than the low PER factor, but when combined with the low PER factor, it showed even greater performance."

Hana Financial Investment identified DL, HMM, Hanwha, and LX International as the top undervalued and earnings upgrade stocks within the KRX300. Among stocks outside the KRX300, they selected Halla Holdings, Songwon Industrial, and Hyundai Home Shopping.

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