These Are the Losing Stocks That Could Rebound in Early 2025

With just a few trading days left in 2024 and the holiday season in full swing—Christmas and Hanukkah coinciding in the same week—market activity is expected to taper as investor participation dwindles. As focus shifts to 2025, strategists at Evercore ISI, led by Julian Emanuel, are eyeing stocks that may have endured a tough year but could stage a comeback in the months ahead.

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Emanuel and his team have analyzed the impact of tax-loss selling, a common year-end strategy where investors sell off underperforming stocks to offset capital gains. Their list of "Tax Loss Targets" includes stocks that have declined more than 20% year-to-date, dropped over 50% since the end of 2021, and have yet to reach new all-time highs since December 31, 2021. These stocks, the team suggests, could see improved momentum as the calendar flips to 2025.

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According to Emanuel, small-cap stocks stand out as potential beneficiaries. The Russell 2000 Index, which tracks smaller companies, has lagged its larger-cap peers since 2022, gaining only 10.6% year-to-date compared to the 24% rise in the S&P 500. Many small-cap names also fall into the tax-loss category, setting the stage for a potential rebound.

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Historically, smaller-cap and lower-momentum stocks tend to outperform in January, a phenomenon known as the "January Effect." Emanuel notes that the Russell 2000 is still trading at a below-average premium compared to the S&P 500. Additionally, a Federal Reserve that continues to lean toward an easing bias could provide further support for these stocks.

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Although small caps appear particularly promising, Evercore’s analysis spans the broader Russell 3000 Index, which includes large-, mid-, and small-cap equities. They highlight that 45% of Russell 3000 stocks are down year-to-date, despite the index itself rising 23% in 2024. This discrepancy underscores the uneven distribution of gains and the potential for recovery among lagging names.

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Among the stocks flagged by Evercore is Nike, which the firm rates as outperform. Despite recent struggles, analyst Michael Binetti sees Nike at a “critical crossroads.” The company’s decision to lower its guidance may have bought time to reset and gain earnings per share flexibility, potentially paving the way for a turnaround. Binetti suggests that even a hint of improving fundamentals by mid-2025 could drive the stock higher as investors begin pricing in normalized margins and a recovery multiple.

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Other names on Evercore’s radar include ZoomInfo Technologies, Avis Budget, Cleveland-Cliffs, and StoneCo. While these stocks are not currently rated by the firm, they are part of what Emanuel describes as a “low momentum, fresh starts” list, making them candidates for a rebound in the new year.

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MarketWatch columnist Mark Hulbert offers a cautionary perspective on tax-loss selling. Investors who offload underperforming stocks at year-end may miss out on the potential bounce these names could experience in January. Hulbert suggests a workaround for those looking to capitalize on these opportunities without losing exposure to the broader market.

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As trading begins this week, the Nasdaq Composite is showing gains, while the S&P 500 is inching higher. However, the Dow Jones Industrial Average is struggling, reflecting mixed sentiment following a Friday rebound for all three major indexes. Despite that recovery, the markets closed last week with overall losses.

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As the year winds down, the focus on tax-loss selling and the potential for underperforming stocks to recover provides a lens into early 2025 opportunities. Small-cap equities, in particular, could be primed for a rebound, supported by historical trends, valuation dynamics, and a potentially dovish Fed. With the right strategy, investors may be able to position themselves to benefit from the bounce-back potential of these "Tax Loss Targets."

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