As volatility in Korea's stock market peaks amid military clashes between the United States and Iran, an increasing number of stocks are seeing the "gap ratio" — the difference between brokerages' target prices and actual prices — widen to record levels. Some stocks are drawing rosy projections of more than 80% upside from targets, but experts say investors should be cautious about chasing buys based solely on the gap ratio.
According to FnGuide on the 16th, as of on the 13th, PharmaResearch, the maker of the medical device "Rejuran," ranked No. 1 in gap ratio among stocks with consensus from three or more brokerages over the past three months. PharmaResearch closed at 308,000 won, with a gap ratio nearing 90% compared with the average brokerage target price of 594,167 won. It was followed by Coway (74.93%), SILICON2 (71.58%), and Contentree JoongAng (71.07%), all posting gap ratios over 70% and placing near the top.
PharmaResearch's share price climbed to 711,000 won in August last year on strong earnings but has since continued to fall, now down to the low 300,000-won range. Han Song-hyeop, a researcher at Daishin Securities, said, "Rejuran, once dominant in the domestic skin booster market, is competing with L&C BIO and Hans Biomed, raising concerns that it may be losing ground at home," and added, "It needs to show that domestic sales and exports are solid, but with the first quarter being a slow season, it's hard to conclude the situation is favorable just by looking at the current gap ratio."
Conversely, some stocks have long since surpassed the target prices set by brokerages. The pace of share price surges is outstripping the speed at which brokerages raise their targets.
In the main board, SGC Energy closed at 63,300 won on the 13th, nearly double the brokerage target price of 36,000 won. SGC Energy announced on Feb. 3 a new business to break ground on an artificial intelligence (AI) data center, and its share price rose 186.43% through on the 13th. Elsewhere, Daewoo Engineering & Construction (-39.08%) and Pearl Abyss (-28.88%) followed.
Kim Jun-young, a researcher at iM Securities, said, "As in this Middle East crisis, when price volatility is high and the index falls sharply in a short period, the gap ratio can widen," and added, "But geopolitical risks do not weaken corporations' fundamentals, so researchers do not readily adjust their target prices."
Investors should be careful about chasing buys just because the gap ratio is high. Kim said, "A high gap ratio does not automatically mean high returns," and added, "Depending on market conditions, the speed at which the gap narrows can differ by stock or sector, and the high-gap situation can also persist, so you need to closely assess whether it is truly undervalued."
As the gap ratio widens, skeptical analyses are emerging about the target prices set by brokerages.
In a recent report, "The investment value of analysts' recommendations and target prices," Kim Jun-seok, a senior research fellow at the Korea Capital Market Institute, analyzed that since 2013 the effectiveness of investment recommendations and target prices presented by brokerages has disappeared. An analysis of data from 2013 to 2024 found that the excess return on buy recommendations plunged to 0.03% and on strong buy to 0.15%, losing statistical significance.
Kim said, "As tighter regulations have blocked the informal channels through which researchers could access corporations' internal information, opportunities for excess returns exploiting information asymmetry have vanished," adding, "The weakening of researchers' information power is closely tied to the diminished discrimination and optimistic bias of recommendations and target prices."