🌱 Beaten stocks set to rise in 2025

Good morning investors! This free holiday edition of our Pro newsletter is all about 2025. As we celebrate the season, it’s the perfect time to look ahead at stocks that fell in 2024 and may deliver strong returns in the new year. We’ll also explore typical January trends and what they could mean for investors.

We looked at comments from experts around the world to curate this special issue.

📊 Stock analysis: Dead stocks ready for a new lease of life?

This section is based on suggestions from Wolfe Research, which thinks that stocks that lagged in 2024 could see a rebound as 2025 begins. This potential recovery coincides with the conclusion of a common year-end practice among investors: selling off underperforming stocks to realize capital losses.

Known as tax-loss harvesting, this strategy allows investors to offset capital gains and reduce tax liabilities. Chris Senyek, Wolfe’s chief investment strategist, suggests that stocks suffering the steepest declines in 2024 may experience a temporary surge at the start of the new year.

Here are some names he has identified:

Dollar General: Struggles and Potential Rebound

Dollar General has endured a challenging 2024, with shares plummeting nearly 44%. The discount retailer revised its outlook for the fiscal year ending Jan. 31, lowering its earnings projection to between $5.50 and $5.90 per share, compared to the previous range of $5.50 to $6.20 per share. Net sales growth estimates were also narrowed slightly.

The company, along with competitor Dollar Tree, faced significant headwinds as inflation constrained low-income consumers' spending power. 

Analysts reduced their fiscal year 2026 EPS forecast for Dollar General, citing cost pressures in 2025 such as higher wages and incentive compensation. However, the bank raised its investment rating from underperform to buy, highlighting early signs of success in Dollar General’s “Back to Basics” strategy.

Analysts see strategic initiatives and market share gains positioning the company for improved performance, particularly in the latter half of 2025.

Intel: A Year of Transformation and Challenges

Intel’s stock has faced a dramatic 60% drop in 2024, marking one of the most challenging years in its history. The semiconductor giant struggled to adapt to the artificial intelligence boom, losing its spot in the Dow Jones Industrial Average to Nvidia in November. Intel is undergoing a significant restructuring, including cost reductions, workforce cuts, and a plan to establish its foundry business as a separate subsidiary.

The year’s turbulence culminated in the abrupt departure of CEO Pat Gelsinger in December, closing a tumultuous nearly four-year tenure. Analysts remain cautious about Intel’s future.

Cantor Fitzgerald’s C.J. Muse described the company’s performance as “horrendous” and highlighted significant challenges with its foundry strategy, noting that a quick recovery is unlikely.

Other Bounceback Candidates: Dexcom, Estee Lauder, and Enphase Energy

In addition, Wolfe Research identified several other significant 2024 laggards that might experience a temporary rebound in early 2025. Dexcom, Estee Lauder, and Enphase Energy are all on the radar as potential candidates for this post-December bounce.

Lessons from the January Effect

Historical data supports the theory of a brief rebound for prior year laggards in January.

Wolfe Research’s analysis shows that the worst-performing stocks often outperform by approximately 2.5 percentage points from late December through January. However, this bounce is typically short-lived. By February and March, these stocks often resume underperformance, frequently lagging behind the market for the rest of the year.

While a January recovery might provide short-term opportunities, investors should approach these stocks cautiously, keeping in mind the historical tendency for their performance to reverse soon after the initial bounce.

📊 Financial Planning: A Winning Trio for January

January presents unique opportunities for investors to achieve outsized returns, according to a recent report by Evercore ISI. Julian Emanuel, the firm’s senior managing director, outlined a three-pronged strategy that capitalizes on historical market trends to identify stocks with strong potential for early-year gains.

January's Distinct Market Dynamics

Emanuel highlighted that January often delivers significant relative returns. In fact, used to be the strongest month of the year in terms of returns. However, this tendency has faded in the last few years. Still, this can be a great strategy, as highlighted by Emanuel. It focuses on three key factors that, when combined, could drive outperformance:

1. Low Momentum Stocks Outperform

We know that low momentum stocks tend to beat high momentum names by an average of 3.3%, approximately 68% of the time. However, this phenomenon is typically short-term in nature, which means it might not be a good idea to ‘hold’ these names for the long-term.

2. Smaller Stocks Lead the Charge

Smaller-cap stocks traditionally outperform larger-cap counterparts in January. This trend, Emanuel suggested, could extend beyond the month if pro-business policies and favorable credit conditions emerge in 2025, providing a long-term tailwind.

3. Buybacks Propel Gains

Companies with robust share buyback programs have consistently outperformed during easing monetary cycles since 1990. Experts think that continued Federal Reserve rate cuts in the new year could further enhance this trend.

Stock Screening for the Winning Combination

To identify potential winners, Evercore screened the Russell 3000 index for stocks that meet three criteria:

• Low momentum (bottom quintile).

• Small to mid-cap size (quintiles three to five).

• High buyback activity (top quintile).

This approach yielded a list of promising names, with Emanuel recommending investors focus on “Small Size/Low Momentum/High Buyback” stocks.

Here are the picks:

Cleveland-Cliffs (CLF)

Steel producer Cleveland-Cliffs has declined 54% this year, but analysts remain optimistic. Goldman Sachs initiated coverage with a buy rating and a 12-month price target of $16, citing:

• Cost-control measures.

• Earnings growth potential from value-enhancing projects.

• Margin expansion through synergies from the Stelco acquisition.

This is a risky name since Cleveland-Cliffs' performance is heavily tied to steel prices, which can fluctuate significantly, impacting its profitability. But, with most analysts expecting prices to stabilize, they seem to now have more faith in the company.

Gentherm (THRM)

Gentherm, which specializes in heated car seat systems, has dropped 26% this year. JPMorgan upgraded the stock in October, highlighting stronger execution despite softer industry conditions. The company’s 2022 acquisition of Alfmeier has driven revenue synergies and accelerated product innovation.

Also, Gentherm's earnings over the next few years are expected to jump by 58%, making it a suitable investment. However, we cannot forget that Gentherm's five year net income decline stood at 6.3%. Furthermore, remember that the company does have a slightly low ROE.

Evertec (EVTC)

Evertec, a financial technology firm offering payment processing in Latin America and the Caribbean, is down 17% in 2024. Morgan Stanley recently upgraded the stock, citing improved diversification in Latin America and stabilizing trends in Puerto Rico.

The stock is currently trading at a discount with a P/E ratio of 10.98 right now. For comparison, its industry sports an average P/E of 26.18

In addition, Evercore suggested names like Avis Budget Group, Udemy, Progyny, and Bloomin’ Brands.

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.