[Practical Investment] Break Through Resistance Lines Using Growth Stocks as a Weapon

How to Escape Unpredictable Volatile Markets

Focus on Sectors with High Price Returns and Rise Probabilities
Profitable Growth Stocks See Price Increases When Generating Free Cash Flow
Interest in Earnings Scarcity... Proportional to Stock Price Increase Rate

[Asia Economy Reporter Myunghwan Lee] Recently, the KOSPI has shown a sluggish trend and has struggled to rebound. Although the index slightly rebounded this month, raising hopes of re-entering a bull market, it soon turned bearish again. In a volatile market where further gains are limited and directionless, which sectors should investors focus on?

The KOSPI touched the 2,500 level after a rare rebound this month but fell back to the 2,400 range due to tightening concerns and the strength of the US dollar. Experts unanimously agree that the volatility in the domestic stock market could intensify further. Some analysts suggest that the so-called "bear market rally," a short-term rebound in a bear market, may already be over.

The securities industry advises focusing on operating profit margins and earnings in such a market. It is expected that downward pressure on the economy will ease in the second half of this year, creating opportunities for stocks with improving operating profit margins to rise. Earnings are also an essential factor when selecting stocks, as stocks with strong earnings tend to move in line with their performance even in a bear market.

Stocks with Improving Operating Profit Margins and Growth Stocks Turning Profitable in a Low Growth Rate Environment

The securities industry diagnoses that the recent domestic stock market index has hit a kind of "resistance line." After the KOSPI fell below the 2,300 level in early July, it rebounded and raised expectations but has stagnated below the 2,500 level since mid-month. Hana Securities pointed out that the KOSPI is currently capped by the 4-month moving average of 2,560.

In this situation where the index has hit a kind of wall, analysts say that whether the economy improves is crucial to breaking through the resistance line. This is because inflationary pressures weighing on the economy are expected to ease in the second half of this year. As a result, the burden of rising costs may decrease, leading to improved profitability.

Accordingly, attention should be paid to companies' operating profits. Jae-man Lee, a researcher at Hana Securities, advised, "Since July 2021, when the KOSPI's operating profit margin peaked, it has started to decline. Although sales have increased since then, sectors that experienced a decline in operating profit margins due to rising costs should be closely watched."

Hana Securities specifically analyzed that sectors expected to show improved operating profit margins in the third quarter compared to the second quarter of this year, and those that historically had a high probability of rising stock prices with improved operating profit margins, should be focused on. These stocks are expected to have opportunities for price increases around the third-quarter earnings announcements. The sectors identified include Chemicals, IT Appliances, Non-ferrous Metals & Wood, Software, and Media & Education. Among these, Software (65.8%), Non-ferrous Metals & Wood (63.9%), and Chemicals (60.8%) are expected to have a high probability of stock price increases.

There was also advice to focus on growth stocks. Since major countries' economic growth rates and corporate profit growth rates are expected to decline next year, growth stocks are anticipated to perform well. However, selective picking within growth stocks is necessary. Stock prices tend to rise when companies generate free cash flow based on their growth concepts.

Therefore, Hana Securities recommends targeting companies expected to turn profitable in 2023 among growth-related sectors such as secondary batteries, software, gaming, healthcare, eco-friendly industries (including nuclear power), and aerospace. They also recommend increasing the proportion of companies expected to steadily improve cash flow as a mid-to-long-term strategy. Companies fitting this profile include Samsung Biologics, Naver, and JYP Entertainment.

Finding 'True Stocks' in the Mud of a Bear Market... Focus on Companies with Strong Earnings

There is also a perspective that attention should be paid to companies that have posted earnings despite the recent economic downturn. This is because the rarity of strong earnings is gaining attention amid global companies' earnings downgrades due to domestic and international adverse factors.

Hana Securities expects the average profit growth rate of domestic companies this year to record a negative growth of -3%. Due to interest rate hikes from tightening in major countries such as the US and rising oil prices, domestic companies' earnings have been consecutively declining. In particular, as large-scale investment plans related to semiconductors have been adjusted, profits in the semiconductor and hardware sectors have been downgraded, causing Korean companies' earnings to experience a greater adjustment compared to the global average. This is because large semiconductor companies like Samsung Electronics occupy a significant portion of the domestic stock market.

In such a bear market, earnings momentum tends to strengthen. Hana Securities analyzed changes in operating profit forecasts and stock price changes for stocks with earnings forecasts from three or more securities firms and found that earnings upgrades and stock price increases were proportional. Especially, stocks with operating profit upgrades over the past one month and three months showed the highest performance. Kyung-soo Lee, a researcher at Hana Securities, said, "This indicates concentrated interest in the scarce stocks with earnings upgrades," adding, "As the market's upward momentum has somewhat dulled, rather than a rotation atmosphere, relatively strong leading stocks with good earnings are being produced."

According to Hana Securities, earnings upgrades were observed mainly in shipbuilding and defense sectors. Sectors such as aviation, textiles and apparel, trading companies, and energy have recently seen earnings improvements.