Beware of Stocks with 'Sell Signals' in the Securities Market

8 Stocks Changed from Buy to Neutral by Two or More Securities Firms Since April
Main Reason for Lowered Expectations Is Earnings

[Asia Economy Reporter Minji Lee] Recently, the domestic index has dropped more than 15% over the past three months, undergoing a prolonged correction. Although most stocks are struggling in this bear market, there are certain stocks expected to decline further. These are the stocks for which securities firms have downgraded their investment ratings from ‘Buy’ to ‘Hold.’ Since nine out of ten reports prepared by domestic securities firms usually recommend buying, lowering the investment rating can be indirectly interpreted as a signal to sell.

According to financial information provider FnGuide on the 5th, since April, a total of eight companies have had their investment ratings lowered to ‘Hold’ by two or more securities firms. The list includes top domestic companies by market capitalization such as Samsung Electronics, LG Household & Health Care, LG Display, GS Retail, Kumho Petrochemical, Com2uS, Hanon Systems, and Lotte Hi-Mart. There was also an unusual sell recommendation in a report; DB Financial Investment drew a line under KakaoBank, stating there is no reason for further investment.

The main reason for lowering expectations was earnings performance. The sell rating on KakaoBank was due to a sharp slowdown in growth and weakening profitability. The loan growth rate, which played a central role in expanding the customer base, is expected to be around 15% this year, significantly lower than last year’s 27%. Researcher Byunggeon Lee of DB Financial Investment said, "Growth will slow due to the burden of loan maturity extensions," adding, "Platform revenue, which can be considered non-interest income for banks, is expected to continue its downward trend starting from the first quarter."

Samsung Electronics is also facing growing concerns over earnings due to sluggish demand for sets. The market’s annual operating profit forecast has dropped by about 5 trillion won (-8%) from 63 trillion won two months ago to 58 trillion won. The home appliances and mobile divisions were burdened by weakening front-end demand amid a slowdown in inventory accumulation. In the semiconductor sector, with expanding price declines for DRAM and NAND, price negotiation power is expected to weaken further due to reduced IT demand. Yangjae Kim, a researcher at Daol Investment & Securities, analyzed, "The trend of earnings decline will continue through the first quarter of 2023," and added, "The weak Korean won is also negative for profitability."

LG Household & Health Care also saw five securities firms simultaneously lower their investment ratings to ‘Hold’ in May due to concerns over earnings. The competitiveness of products, including ‘Whoo,’ is deteriorating in the Chinese market, leading to expectations of poor performance in both the second quarter and the full year following the first quarter. Securities firms estimate the second-quarter operating profit at 208.2 billion won, down 37% from three months ago, and have revised the annual profit downward by 33% to 859.3 billion won. LG Display is also expected to post a loss (-112.5 billion won) in the second quarter following a shock deficit in the first quarter. Opinions on second-half earnings are divided between ‘improvement’ and ‘continued losses,’ but due to falling LCD panel prices and a decline in OLED panel shipments caused by weak demand, a dramatic turnaround is considered unlikely.

Additionally, securities experts recommend a conservative approach to companies that have enjoyed high valuations since the COVID-19 pandemic. Although HiteJinro has seen increased sales of both beer and soju following social distancing measures, the current stock price already reflects expectations for earnings, suggesting limited upside potential compared to the current price. CJ CGV is expected to return to profitability in its theater segment from the third quarter due to ticket price increases, but stock price volatility may increase, warranting cautious investment.