This simple year-end stock-picking strategy tends to beat the market

  • Stocks that lag throughout a particular year tend to rebound in the beginning of the following year, according to analysis from Jefferies.
  • Looking back to 1990, the firm found the six worst-performing industry groups in the first 11 months of the year tend to outperform in December through May.
  • "Lagging groups in one year do not tend to lag in the next," Jefferies equity strategist Steven DeSanctis says.
Dead heat horse race
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Investors looking for a year-end strategy may want to consider some beaten-down sectors.

Historically, those that have lagged the broader market in first 11 months of a year tend to turn around in the subsequent trading year, according to analysis from Jefferies.

"Lagging groups in one year do not tend to lag in the next," Jefferies equity strategist Steven DeSanctis wrote in a note to clients Monday.

Looking back to 1990, the firm found that the six worst-performing industry groups from January through November have tended to outperform by 92 basis points in December through May.

It's "not a huge number, but at least the bleeding tends to stop," DeSanctis said.

Individual names in underperforming sector groups that fit that strategy this year include Broadcom, Ford Motors, KeyCorp, NXP, Invesco, General Mills and Commercial Metal, all of which Jefferies has a "buy" rating on.

DeSanctis pointed to a few macro events that set the stage for new leaders in the market — Democrats won control of the House of Representatives, U.S. crude oil is giving up year-to-date gains, 10-year yields are rising, and value stocks have been outperforming.

"All these changes come at a time of year when investors are looking for rotation candidates," DeSanctis said. "This makes some of the lagging groups that had been on the wrong side of the above trends worthy of further examination."

High-growth tech stocks had been a favorite for investors during the historic bull market. But in the past month, they have been pouring into defensive groups, which tend to provide a stable dividend regardless of stock market conditions. There also seems to be more interest in cyclicals such as autos, housing, banks and materials stocks as investors "seek value in equities that have been discounting a slowdown, are less crowded, or for which things are arguably getting less bad," DeSanctis said.

U.S. stocks closed more than 300 points higher on Monday, helped by a rise in those beaten-down tech stocks that saw steep losses last week.