[Desk Column] Kostolani's Dog

[Asia Economy Reporter Jeon Pil-su] #1. On the 2nd, auto parts manufacturer Seoyeon E-Hwa surged to the daily limit. Fur company Jindo closed up more than 23%. On the 3rd, Seoyeon E-Hwa’s affiliate Mobeis Electronics also hit the daily limit.

#2. Samsung Electronics surpassed 70,000 won for the first time after its 50-for-1 stock split (intraday on the 3rd). Before the split, this corresponds to an astonishing 3.5 million won. SK Hynix crossed the 100,000 won mark for the first time on the 2nd and rose to the 110,000 won level on the 3rd.

Despite the economic difficulties caused by COVID-19, the stock market has been erupting with joyful cries day after day. The KOSPI broke through 2,700 on the 4th, continuously setting new all-time highs. The total market capitalization of the KOSPI has already exceeded 1,900 trillion won. The KOSDAQ index also broke the 900 mark.

With the stock market soaring, many investors are humming happily, and even those who did not previously invest are jumping into the market. Customer deposits, which can be considered as funds waiting to buy stocks, have risen from less than 30 trillion won at the beginning of the year to over 65 trillion won. The phrase "If you don’t invest in stocks, you’re a fool" is becoming common.

In fact, quite a few people have made decent profits in the stock market this year. However, not everyone makes money even in such a market. Many still suffer from declines in the stocks they invested in.

Why is that? The main drivers of this market rise were the top two by market capitalization, Samsung Electronics and SK Hynix. Over the past month, Samsung Electronics rose from around 57,000 won to about 70,000 won, and SK Hynix increased by more than 30% from 80,000 won. Although these are strong moves for stocks with market caps of 420 trillion won (Samsung Electronics) and 80 trillion won (SK Hynix), they are slow compared to stocks that easily rise 30% in a single day.

Investors eager for faster and bigger profits look for stocks that can hit the daily limit. The surge in Seoyeon E-Hwa and Jindo on the 2nd and 3rd was unexpectedly triggered by Prosecutor General Yoon Seok-yeol. The stock price explosion momentum came from the court partially accepting Yoon’s injunction request against the job suspension order issued by Justice Minister Choo Mi-ae, allowing Yoon to return to work.

To those unfamiliar, this may sound absurd, but these stocks are classified as so-called ‘Yoon Seok-yeol theme stocks.’ Looking at the theme stocks, their connections to other political theme stocks are similar. Seoyeon E-Hwa was named a theme stock because its outside director, a former prosecutor, is an alumnus of Seoul National University Law School alongside Yoon. Jindo was included because its outside director appointed this year is a classmate of Yoon from the Judicial Research and Training Institute.

A commonality is their poor performance in recent years. Seoyeon E-Hwa recorded net losses of 8.1 billion won and 6.5 billion won in 2018 and 2019, respectively, and posted a net loss of 18.5 billion won through the third quarter this year. Jindo turned from a 5.6 billion won profit in 2018 to a 2.7 billion won loss in 2019 and recorded a net loss of 1.2 billion won through the third quarter this year. Mobeis Electronics also posted net losses of 16.9 billion won in 2018, 9.9 billion won in 2019, and a cumulative 6.9 billion won loss through the third quarter this year.

On the other hand, Samsung Electronics posted a net profit exceeding 21.7 trillion won last year and is on track to surpass last year’s profit with over 19.8 trillion won through the third quarter this year. SK Hynix’s net profit was just over 2 trillion won last year but is approaching 3 trillion won through the third quarter this year.

Of course, investing in large-cap stocks like Samsung Electronics is not necessarily the only right answer, nor is investing in theme stocks always wrong. Theme stocks often yield better short-term returns. The problem is that bubbles caused by stock price surges unsupported by fundamentals inevitably burst.

"When taking a dog (stock value) for a walk, the dog may walk ahead or behind the owner (corporate value), but it cannot leave the owner." (Andr? Kostolany)