Going beyond the "tenbagger" (a stock that rises tenfold), a dream for stock investors, stocks that have surged 100 times are emerging in the domestic market. The common trait among stocks that have skyrocketed in a few years is that they are "turnaround (earnings rebound)" corporations that succeeded in recovering their business conditions.
Focusing on new growth industries is one way to find stocks that rise, but in Korea's stock market, analysts in the securities industry say turnaround stocks can offer higher returns. Because the domestic market has a high share of cyclical stocks, corporations that overcame weak earnings and managed a rebound often show strong share-price gains.
This year, domestic and overseas stock markets rose on the back of the global artificial intelligence (AI) investment cycle. In particular, in Korea, industrials such as HD Hyundai Electric, LS ELECTRIC and Hyosung Heavy Industries gained on expectations they would be included in the AI value chain. These stocks attracted investors' attention by rising as much as 100 times from their lows.
According to Hanwha Investment & Securities, since the 1990s the average time it took for stocks to rise 100 times was about 15 years. But HD Hyundai Electric and Hyosung Heavy Industries achieved a 100-fold increase in 5 years and 3 months. It shows how powerful the upward momentum of turnaround stocks can be.
A key indicator for screening turnaround stocks is to compare short-, mid- and long-term operating margins. The three-year operating margin shows a corporation's long-term margin profile, while the one-year operating margin reflects short-term industry trends.
The point at which the one-year operating margin surpasses the three-year operating margin is interpreted as a signal that a corporation's earnings have entered a rebound phase. In fact, in the case of HD Hyundai Electric, after the one-year operating margin bottomed in the second quarter of 2019, it broke above the three-year operating margin in the second quarter of 2020. The share price then rose 100 times.
Kim Su-yeon, an analyst at Hanwha Investment & Securities, said, "If you had bought based on this signal at the time, the share price would have risen at an annual rate of 121% afterward."
The Korea Composite Stock Price Index (KOSPI) started the year at the 2,400 level and broke above 4,000, but about 30% of all listings are still down from the start of the year. In the KOSDAQ market, the share exceeds 40%. This shows that gains have been concentrated in a few industries such as AI and biotech.
Amid this, some stocks are flashing signals of an earnings rebound. Hanwha Investment & Securities said LG CHEM turned to profit in the third quarter this year, and its one-year operating margin is also rebounding. SK Innovation, LOTTE Chemical and Korea Petrochemical Ind. Co. are showing similar trends.
In addition, some stocks such as Celltrion and RS Automation also have turnaround potential, and their share prices are expected to rise going forward, according to assessments. Kim said, "We are passing the trough of the current cycle, and investors should keep an eye on corporations that could turn around," adding, "Stocks with a confirmed earnings rebound may see their prices climb quickly."