7 of Top 10 Short-Selling Stocks Show 'Poor' Returns... 63% Have Low Returns

Eugene Investment & Securities Analyzes Returns of Top 30 Short-Selling Stocks
Top 30 Stocks Show -5% Returns Over 3 and 6 Months
Bottom 30 Stocks Show 7% Returns Over 3 Months, 21% Over 6 Months

"There Are Reasons for High Short Selling; Caution Is Needed"

[Asia Economy Reporter Ji Yeon-jin] It has been found that stocks with lower short-selling balances yield better returns than those with higher short-selling balances. Additionally, while a 'long-short strategy'?buying stocks with low short-selling and selling those with high short-selling?has been suggested as an investment method during bear markets, analysis shows its effectiveness diminishes in sharp declines exceeding 20%.

On the 8th, Eugene Investment & Securities examined stocks with the highest cumulative short-selling balances relative to floating shares among companies with a market capitalization of over 1 trillion won listed on the KOSPI and KOSDAQ. The top 30 stocks by short-selling balance underperformed the KOSPI by 5% over the past 3 and 6 months. Looking at recent monthly earnings, 73% of 10 companies underperformed the KOSPI returns.

Conversely, the 30 stocks with the lowest short-selling balances recorded excess returns of 7% and 21% over the KOSPI in the past 3 and 6 months, respectively. Kang Song-cheol, a researcher at Eugene Investment & Securities, stated, "Considering that there may be reasons for high short-selling in certain stocks, it is reasonable to be more cautious when investing in those stocks. While high short-selling can be interpreted as a negative signal for stock prices, low short-selling can conversely be seen as a positive signal."

Using this short-selling data, Researcher Kang analyzed monthly returns from 2014 to August for KOSPI200 companies by selling the 30 stocks with the highest short-selling and buying the 30 stocks with the lowest short-selling. The period from March 2020, when short-selling was banned, to the end of April last year was excluded.

As a result, the annual average return of this 'long-short strategy' was 6.6%. Notably, the strategy of buying only the 30 stocks with the lowest short-selling in the KOSPI200 achieved a cumulative return of 63% during this period. The selling strategy yielded a cumulative return of 31%. Researcher Kang noted, "Over the entire period, the positive returns of the long-short strategy were more contributed by the long positions than the short ones." From 2014 to August this year, the KOSPI200 index rose by 28%.

However, the long-short strategy was heavily influenced by market sentiment. From 2018 to 2019 and from the second half of 2021 to August 2022, performance significantly declined, with annual average returns around 2% to 3%, lower than the 10.4% annual average return from 2014 to 2017.

From January 2018 to February 2020, the KOSPI200 index fell by 20%, and from June 2021 to August 2022, it dropped by 26%. Both periods were bear markets with declines exceeding 20% from their peaks.

Researcher Kang explained, "In bear markets, especially when the market falls more than 20%, the differences in returns among stocks narrow because all stocks fall 'indiscriminately.' In such market conditions, it is difficult to outperform the market through stock selection."

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