[Practical Finance] Volatile Market Taking a Breather... Find Stocks with Strong Earnings

Concerns Over Austerity Weigh on KOSPI, Boosting Interest in Earnings Stocks
Automobiles, Machinery, Transportation, Semiconductors Expected to Deliver Earnings Surprises

As summer approaches, the domestic stock market, which was expected to be on the rise, has taken a hit. Concerns over tightening have resurfaced, worsening investor sentiment. This is due to expectations that the U.S. Federal Reserve (Fed) will implement additional interest rate hikes. However, amid this situation, the Q2 earnings season is approaching, raising expectations for 'earnings stocks.' With companies like Samsung Electronics and LG Electronics announcing their results, the earnings season has officially begun. Starting from the third week of this month, corporate performance will be announced in earnest. In a situation full of uncertainties such as inflation, investors are focusing on corporate results that can drive stock price increases.

Hyundai Motor and Kia Expected to Break Record High Earnings

According to the Korea Exchange, on the 10th, the KOSPI closed at 2,520.70, down 6.01 points (0.24%) from the previous trading day. The index had been on an upward trend since May 12, even surpassing the 2,640 level as recently as June 9, about a month ago. However, it then declined and eventually fell to the 2,520 level. The forecast that the domestic stock market would show an upward trend in summer due to revived exports and improved corporate conditions was off the mark.

In this context, companies showing external growth and earnings improvement are expected to lead the market during the Q2 earnings season. Domestic securities firms have identified the automobile and machinery sectors as leading industries for the Q2 earnings season. In particular, the estimated operating profits for Hyundai Motor and Kia in Q2 are 3.6535 trillion KRW and 3.0242 trillion KRW, respectively, representing increases of 22.6% and 35.4% compared to the same period last year. Strong vehicle sales in North America and other global markets, combined with a weaker Korean won and lower raw material prices, are expected to help break record high earnings. Shin Dong-gil, a researcher at Shinhan Investment Corp., said, "The Q2 KOSPI consensus for sales and operating profit is 646 trillion KRW and 38.7 trillion KRW, respectively, with minimal downward revisions from the peak estimates," adding, "Considering the export growth rate converted to Korean won and margins, KOSPI Q2 earnings are not expected to fall significantly below estimates."

He further explained, "Q2 earnings are likely to be more sensitive to sectors than to the index when considering export differences by product and region," noting, "While exports to China remain sluggish in Q2, exports to the U.S. were solid, so the domestic leading stock structure centered on automobiles and machinery is unlikely to change significantly during the earnings season." Researcher Noh classified transportation, semiconductors, IT hardware, machinery, automobiles, and steel as sectors with upward revisions in Q2 earnings forecasts.

Additionally, DB Financial Investment identified sectors with many companies expected to deliver earnings surprises, including construction and architecture, automobiles, healthcare, software, and semiconductors. Specific stocks mentioned were Korean Air, SK Bioscience, DearU, K Car, Pearl Abyss, Hanssem, Green Cross, Lotte Chemical, Pan Ocean, Shinsegae, and DL E&C. Hanwha Investment & Securities highlighted IT hardware, software, and automobile sectors, along with individual stocks such as LG Innotek, Pearl Abyss, Iljin Hi-Solus, Hi-Vision Systems, HMM, and Com2uS.

Q2 Earnings Seen as Bottom... "Greater Expectations for Second Half"

However, since Q2 is generally considered the bottom of earnings, there are also explanations that expectations for the second half are even greater. Park Kwang-nam, a researcher at Mirae Asset Securities, said, "Domestically, it is inevitable to view earnings in connection with the global economy rather than domestic demand, and earnings stocks will ultimately be related to this," adding, "In the U.S., the market expects Q2 earnings to be the bottom and to improve in Q3 and Q4, and the perspective on domestic corporate earnings is similar." He continued, "If IT companies or related firms raise guidance during the U.S. earnings season, or if a phase emerges where corporate profits rise in the second half after bottoming out in Q2, the outlook for domestic semiconductor and IT sectors will also be positive."

Kim Young-hwan, a researcher at NH Investment & Securities, said, "The current volatility in the capital market is due more to the Fed's monetary policy than to earnings," and forecasted, "Once expectations arise that the interest rate hikes will conclude, stocks with good earnings in the second half are likely to move." The market is focusing on whether the Fed will raise rates again in September, following the widely expected hike in July.

Kim also said, "I expect Q2 earnings to be lower than Q1, but they will jump significantly in Q3," adding, "Among semiconductor stocks, I prefer Samsung Electronics and SK Hynix, and among shipbuilding stocks, Samsung Heavy Industries." He predicted that if LNG (liquefied natural gas) ship orders from Europe increase, shipbuilding stocks' earnings will turn positive, and he also viewed defense stocks as promising. Kim added, "If Europe and other regions continue to import weapons, the defense sector's earnings are expected to remain strong for several years as weapon systems continue to be used."

Hana Securities stated that while interest in earnings is fundamental during the Q2 earnings announcement period, focusing solely on earnings is not advisable for investors prioritizing short-term performance. Lee Kyung-soo, a researcher at Hana Securities, said, "Ironically, stocks with upward earnings revisions have performed poorly in July," adding, "This may be due to the 'Sell-on' phenomenon spreading like a trend during the earnings season. Although it is only a temporary adjustment, stocks with upward revisions tend to rebound in August."

Lee suggested that rather than adopting a strategy of selling earnings stocks, it would be better to focus on earnings stocks that have seen less institutional inflow or whose stock prices have risen relatively less. He identified Hanwha Solutions, NCSoft, Kakao, Korea Shipping, Orion, Samsung Electro-Mechanics, Samsung Engineering, Jin Air, Hyundai Construction, Hyundai Steel, Nongshim, Hyundai Department Store, PI Advanced Materials, and Innocean as belonging to this group.

He also listed large-cap stocks with short-term quarterly earnings improvements amid a downward earnings trend, including Samsung Biologics, Kakao, Celltrion, Hyundai Mobis, LG Electronics, HYBE, Samsung Electro-Mechanics, Korean Air, Meritz Financial Group, Hyundai Glovis, Doosan Bobcat, Orion, and Hyundai Steel. Sectors with high potential for Q2 earnings surprises include aviation, chemicals, shipping, broadcasting and entertainment, and electrical equipment, while sectors likely to miss earnings include refining, hotel and leisure, gaming, technology hardware, shipbuilding, steel, cosmetics, and non-ferrous metals.

Foreign Investors Buy Stocks Showing Earnings While Favoring Semiconductors

Although foreign investors sold more than 320 billion KRW worth of listed stocks net in the previous month, interest in the stocks they purchased remains a valid investment strategy. According to the Financial Supervisory Service, as of the end of last month, foreign investors turned to net selling of listed stocks after three months and held 691.7 trillion KRW worth of stocks, accounting for 26.9% of the total market capitalization.

Researcher Kim said, "Although it is not always true, looking at the current situation, the domestic stock market has actually been a market where foreign buying drives the rise," adding, "Among large-cap stocks by market capitalization, foreign investors have shown confidence in semiconductor and secondary battery-related stocks, and there seems to be little room for this to spread elsewhere."

Heo Jae-hwan, a researcher at Eugene Investment & Securities, said, "Foreign investors' preference for semiconductors continues," but explained, "Stocks that foreign investors have actively bought more than Samsung Electronics are those with solid earnings such as Hyundai Motor and LG Electronics." He added, "However, in July, foreign investors' trading patterns are changing. The stocks they are buying are POSCO Holdings and EcoPro, which they had actually reduced their holdings in during May and June this year, indicating that the stock market momentum has weakened. While maintaining the view to increase semiconductor weight, there is a need to pay attention to stocks that have underperformed this year in the short term."

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