[Inside Chodong] Why Sorting the Wheat from the Chaff in Theme Stocks Matters

Political Theme Stocks Surge Ahead of Early Presidential Election
Stocks Linked to Specific Politicians Through School or Regional Ties
Share Prices Soar and Plunge Irrespective of Corporate Fundamentals

On the 7th, global stock markets plummeted. The KOSPI and KOSDAQ each fell more than 5%, as panic selling emerged amid the shock of the tariff war and ensuing fears of an economic recession, recreating a 'Black Monday' in the stock market. Despite the sharp decline, some stocks stubbornly rose. These stocks did not just increase moderately but surged to their upper price limits. On that day, 16 stocks hit their upper limits, and except for one, all were political theme stocks.

Political theme stocks are running rampant. Since the emergency martial law incident in December last year, political uncertainty has caused political theme stocks to surge even though it was not election season, causing volatility. Following the Constitutional Court's decision to impeach the president on the 4th, which confirmed an early election, political theme stocks have been even more volatile. Among the seven stocks that recorded triple-digit gains amid increased market volatility this month, six were political theme stocks. Sangji Construction, which recorded the highest increase this month, rose more than 650% just this month. The stock price, which was 3,400 won at the beginning of the month, jumped to 25,700 won. After hitting the upper limit for six consecutive trading days from the 2nd to the 9th, it was designated as an investment warning stock and trading was suspended for one day on the 10th. However, once the suspension was lifted, it hit the upper limit again for two consecutive days, was designated as an investment risk stock, and trading was suspended again. Sangji Construction was classified as a theme stock related to Lee Jae-myung, former leader of the Democratic Party, after it was reported that former outside director Im Mu-young, who retired in March last year due to term expiration, joined Lee’s election campaign.

Political theme stocks are formed around politicians' policies or networks. As the presidential election approaches, online platforms circulate comprehensive lists of theme stocks related to presidential candidates. These lists classify theme stocks based on candidates' politics and networks. Stocks classified as political theme stocks due to policies can expect some positive impact if the relevant policies are implemented in the future. However, political theme stocks tied by personal connections such as school or regional ties often show surprising cases where stocks rise simply because of such links. Stocks are grouped as theme stocks based on any conceivable connection, such as sharing the same surname, the company being located in the politician’s hometown, or an outside director being an alumnus of the same school as the politician.

It is rare to find political theme stocks that continue to perform well after soaring. Ewha Gongyeong, a mid-sized construction company, filed for corporate rehabilitation with the court earlier this month. It also received a 'disclaimer of opinion' from auditors, triggering delisting reasons. Ewha Gongyeong is considered the 'original' domestic political theme stock. In 2007, it was classified as a Lee Myung-bak government theme stock, and its stock price rose nearly 25 times from around 2,600 won in August 2007 to 67,400 won in December of the same year within four months. In 2017, it was a theme stock for the restoration of the Four Major Rivers, and recently it was also grouped as a theme stock related to former leader Lee Jae-myung. Sambu Construction also received a disclaimer of opinion, triggering delisting reasons. It was classified as a Ukraine reconstruction theme stock in 2022 and later as a theme stock related to former Prime Minister Lee Nak-yeon because its CEO was Lee’s younger brother. These are clear examples of the bitter end of theme stocks. Numerous stocks are grouped as theme stocks, briefly shine with rapid price increases, then fall and are forgotten after the election ends.

Political theme stocks that surge without consideration of a company’s performance or financial condition, merely because they seem vaguely related, must be approached with caution. Most often, stock prices plunge after elections, and major shareholders or management frequently sell large amounts of shares during the price surge, leaving investors to bear the losses alone.