Sluggish Q2... Focus Needed on Upgraded Earnings Stocks

As domestic companies continue to post sluggish earnings, some experts advise that investors should pay attention to companies delivering earnings surprises. When a company records an earnings surprise, there is a high probability that it will generate superior excess returns compared to the KOSPI growth rate.

Just before hitting the reporting point, the KOSPI, which had sharply fallen, rose nearly 1% during the session. On August 4, at the Hana Bank dealing room monitor in Jung-gu, Seoul, the KOSPI along with the won/exchange rate were displayed. On that day, the KOSPI opened at 3,114.27, down 5.14 points (0.16%) from the previous trading day, but rose more than 1% during the session. Photo by Cho Yongjun

According to Yuanta Securities on August 5, as of August 1, 95 out of 200 companies in the Universe 200 group had completed their earnings announcements, marking a progress rate of approximately 47.5%.

By industry, the defense sector is recording the highest quarter-end consensus achievement rate at 110.9%. This is followed by the construction sector at 109.4% and the shipbuilding sector at 107.3%. The defense sector has recorded an earnings surprise, exceeding estimates that were revised upward by about 55.1% compared to the beginning of the year, while the shipbuilding sector has also recorded an earnings surprise, surpassing estimates that were revised upward by about 44.9%. This confirms the robust growth of these leading industries.

In contrast, overall market performance has been weak. Shin Hyun-yong, a researcher at Yuanta Securities, explained, "The overall achievement rate in terms of value was 94.1%, which is below the second-quarter average of 101.5% since 2015." He added, "Even if the remaining companies meet their estimates, the rate is expected to stay at 95.9%. After the 'earnings shock' of Samsung Electronics, profit forecasts for the semiconductor and equipment sectors have dropped sharply."

However, Shin emphasized that in such situations, companies with earnings surprises tend to deliver better performance. He stated, "Since 2015, on average, companies with earnings surprises have recorded excess returns of 4.1 percentage points over the KOSPI in the month of their earnings announcement, and 3.1 percentage points in the following month." He highlighted that "the positive momentum from an earnings surprise tends to persist into the next month."

He further explained, "When examining performance based on achievement rates, it is clear that when the overall market achievement rate falls below 100%, the relative performance of companies with earnings surprises becomes even more pronounced." He added, "In a situation where overall profit expectations are low due to poor achievement rates, companies that record earnings surprises stand out even more."

Yuanta Securities identified Korea Electric Power Corporation, Paradise, Isu Petasys, PharmaResearch, Leeno Industrial, JYP Entertainment, KT, and SM as stocks to watch for the remainder of this season. These companies have had their operating profit estimates revised upward compared to the end of June, and the gap between analysts' forecasts has narrowed, indicating a high probability of earnings surprises.

Shin emphasized, "After the announcement of the tax reform plan, the KOSPI has shown high volatility." He added, "Given the weak index trend and high volatility, reliance on earnings results is expected to increase even further."