Investors should bet on the 2016 laggards, Goldman Sachs' options research team says, noting that stocks that have underperformed the S&P 500 in 17 of the last 25 years have ended up as leaders the following year.
The research note recommends buying calls on 15 selected stocks with liquid options on track to be this year's laggards. Buying call options offer investors exposure to upside but not to downside in a given time period.
Many of the recommendations are health-care stocks, the worst-performing sector in the S&P 500 this year (the sector was pulled down by biotech stocks, which fell nearly 11 percent as the worst-performing industry group).
Nicholas Colas, chief market strategist at Convergex, likes the strategy of buying market laggards, but he has two reservations about using options in particular.
"The first is, you have to kind of buy all the ideas in that basket because you can't really pick and choose. Some are going to work, and some aren't," Colas said Thursday on CNBC's "Trading Nation." "The second thing is, options might not be the best way to play it. You might want to buy the underlying asset because sometimes it takes one quarter or two quarters to get that bounce back through fundamentals or reversion to the mean."
The Goldman report highlights pharmaceutical company Endo International, down 75 percent year to date as the Justice Department has looked into the possibility of several drug manufacturers taking part in price collusion. Other names highlighted as laggards with the potential to turn around next year include Tenet Healthcare, Allergan and Mylan.
Names from the consumer discretionary sector, the third-worst performing sector year to date, include H&R Block and TripAdvisor, down 32 percent and 44 percent year to date, respectively. The S&P 500 has gained nearly 10 percent in the same time.
"The laggard effect has been even more pronounced in recent years with only two years of the past decade (2015 and 2009) showing negative performance," the options research team, headed by Katherine Fogertey, wrote, citing a 25-year study by Goldman Sachs' tactical research team.
Interestingly enough, the report said, "laggards" tend to not only perform well the following year relative to the market, but on a sector-relative basis, as well. Such has been the case in all but one year in the last decade, according to the report.