[Finding Leading Stocks②] Warren Buffett's Investment Magic 'Low PER·High ROE'... The Best Combination Including PBR

Sector with High Absolute ROE and Positive Future Earnings Outlook 'Secondary Battery'... LG Energy Solution in Focus
Ostem, Coway High ROE... Top PBR+PER Stocks Include Hyundai Motor, Kia, Samsung C&T, etc.

Editor's NoteIt is truly a 'falling leaves in autumn' situation. The domestic stock market, having entered a period of negative earnings where stock prices and corporate profits decline simultaneously, is losing momentum under downward pressure. However, there are 'hidden gems.' A bear market can present investment opportunities. Because stocks can be bought cheaply, it is important to seize the chance for these 'hidden gems' to become leading stocks. Stocks with strong export indicators, those with excellent valuations (PER, PBR, ROE) that can yield profits through long-term investment, and high-dividend stocks that can maintain stable earnings even in a weak market are the answers.

[Asia Economy Reporter Lee Seon-ae] As the market enters a period of negative earnings, investment advice emphasizes focusing on fundamental investment principles. That is valuation. Selecting stocks by checking return on equity (ROE), price-earnings ratio (PER), and price-to-book ratio (PBR) increases the likelihood of profits in long-term investments. Especially, investing in companies with ROE exceeding 15% for more than three years and undervalued stocks, known as the 'high ROE + low PER' strategy, is an investment formula emphasized by Warren Buffett, chairman of Berkshire Hathaway and a master of value investing.

On the 10th, Meritz Securities identified the 'secondary battery' and 'defense' sectors as those with high absolute ROE levels and positive future earnings outlooks. They regarded secondary batteries as superior even to defense. Solar power, nuclear power, and shipbuilding were noted as sectors needing proof of profitability (further improvement). LG Energy Solution was named the top preferred stock within the secondary battery sector.

Researcher Noh Woo-ho of Meritz Securities explained, "With the Inflation Reduction Act (IRA) making 'Made in USA' the industry norm, LG Energy Solution was selected as the top pick for proactively responding to the US-centered supply chain restructuring." It is evaluated that LG Energy Solution completed vertical integration even before the IRA announcement through raw material procurement from South America, material partnerships with domestic companies like LG Chem, direct engagement with North American customers in production, and recycling collaboration with LI-cycle companies. Meritz Securities set LG Energy Solution's target price at 680,000 KRW.

Stocks with consistently high ROE are also of interest. According to the Korea Exchange, an analysis of listed companies' ROE over four years from the first half of 2019 to the first half of this year classified iCredible, Intec Plus, Osstem Implant, AfreecaTV, and Coway as high-ROE stocks. These companies recorded double-digit ROE annually over the past four years, exceeding 15%.

Kim Hak-gyun, head of Shin Young Securities Center, advised, "Maintaining a consistently high ROE in the past, as well as the current ROE, is a driving force for long-term stock price increases."

Senior researcher Cho Sang-hoon of Shinhan Financial Investment said about Coway, "Coway has the three elements of a defensive business, a high-growth global market, and protection against interest rate hikes," and presented a target price of 95,000 KRW. The expected ROE based on this year's forecasted earnings is 24.34%. Although slightly lower than last year's 27.41%, it still qualifies as a 'company with ROE over 15%.'

PER and PBR can also be used as investment indicators. According to FnGuide, among 280 KOSPI and KOSDAQ listed companies with forecasts from three or more securities firms, 124 companies have a 12-month forward PBR below 1. Companies such as SK Hynix (0.86x), Hyundai Motor (0.62x), and POSCO Holdings (0.35x) were highlighted.

The most ideal combination is PBR + PER. A low PBR but high PER suggests that the company's profit structure is inefficient relative to its asset size. Accordingly, companies with PBR below 1 and expected sharp growth in operating profit in Q3 this year include Lotte Shopping, Korea Gas Corporation, Hansol Paper, and Samsung C&T.

Among 198 KOSPI-listed companies with forecasts from three or more securities firms, 91 companies have a 12-month forward PER lower than the KOSPI average and PBR below 1. The representative sector with upward revisions in Q3 operating profit estimates among these is the automobile sector. Companies of interest are Hyundai Motor and Kia.

Hyundai Motor's PER is 6.6 times, indicating room for stock price growth. Its PBR is 0.6 times. The Q3 operating profit estimate for Hyundai Motor is 2.6474 trillion KRW, a 64.8% increase year-over-year and a 29.9% upward revision compared to early June three months ago. Kia's PER is even lower at 5 times, with a PBR of 0.7 times. Its Q3 operating profit estimate is 2.0809 trillion KRW, expected to increase 56.8% year-over-year. This is a 28.4% upward revision compared to the estimate three months ago.