Market analysts list potential stocks vulnerable to short sale once trade returns

Stocks that could potentially be removed from large-cap tracking benchmarks in Korea and MSIC index could become first targets for shot selling once the cap on the trade is lifted in May after a 14-month ban starting with big-cap issues.

Short-selling allows an investor to profit from a falling stock. The practice has been temporarily outlawed since March last year amid Covid-19 market rout, but is scheduled to resume on May 3.

Stock short sale is usually done by foreign investors, so market experts believe stocks showing strong foreign net sale or sudden surge in borrowing could be targets of short selling.

Samsung Securities said offshore investors took up 65 percent short sale transactions on the Kospi market and 73 percent on the Kosdaq market from June 2017 to March 2020. By the standard of the number of shorted shares and foreign net sale as of the end of March, Samsung Securities picked Lotte Tour Development, Doosan Infracore, Hotel Shilla, Hanjin KAL, Samsung Heavy Industries, Toptec, Partron and BH as likely targets.

Some over-valued securities can also be profit opportunities for short sellers. Kim Min-gyu, an analyst from KB Securities, said stocks that have been heavily shorted in pair trades and valued higher than competitors are targets for short selling. The stocks include SK Innovation, SKC, AmorePacific, Meditox, Pearl Abyss and KG Inicis.

Market analysts raise the alarm for companies offering a large volume of hybrid securities like convertible bonds. Convertible bond buyers often sell short the same issuer¡¯s common stocks to hedge the risk. Hanwha Investment Securities estimate LG Display could see up to 563.1 billion won worth stocks shorted, Hwaseung Enterprise 117.3 billion won, Kiwoom Securities 63.3 billion won and Lotte Tour Development 57.9 billion won.

Short selling is allowed for stocks included in the Kospi 200 and Kosdaq 150 list. Korea Exchange, the nation¡¯s sole stock exchange operator, plans to modify the Kospi 200 and Kosdaq 150 in mid-May, so stocks expected to join or leave the index may invite short selling.

Short sellers could also have an eye to companies expected to be cut from the MSCI index of the Morgan Stanley Capital International because the removal would result in stock declines for the companies.

Meanwhile, Lee Kyung-soo from Hana Financial Investment predicted the resumption of short selling would bode well for undervalued stocks. The brokerage said SK Chemical, Hanjin, Lotte Chemical, Hyundai Glovis, Chong Kun Dang Pharmaceutical, Kiwoom Securities, SNT Motiv and Douzone Bizon may benefit from the return of short-selling tool.

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