Will this year’s worst-performing stocks be next year’s darlings?

Can one year's losers become winners? We explored this theory early this year, looking at the worst-performing stocks in the major indexes of both the United States and Canada. The idea was that these dogs would actually outperform the market in January – and perhaps even for the year.

Well, the year is just about up, and the results suggest there's something to it, at least in the United States. In Canada, the thesis is much more problematic.

Before we get to the numbers, however, a simple "why" might be in order. It could be reversion to the mean, of course. But Barron's, the U.S. investing newspaper that wrote about the concept a year ago, suggests many investors sell at year-end to capture losses to offset capital gains. Plus, institutional investors may be dumping them so they don't appear on year-end portfolio holdings lists. (My manager owned that stock? What a moron!)

The idea is that many of these losing stocks would gain in the first few trading days of the new year, which indeed happened. The phenomenon actually continued, however: Some of the U.S. names would make investors look downright smart appearing on year-end 2013 lists.

By my count, the 10 worst-performing stocks in the Standard & Poor's 500 for 2012 have returned an average 48.9 per cent in 2013, through last Friday's trading. That's nearly twice the index' gaudy 27.5 per cent return.

The big, big winner was Best Buy Co. Inc., which has more than tripled this year (earning it the No. 3 rank among S&P 500 performers in 2013). Postage-meter-maker Pitney Bowes Inc. (of which I own 200 shares) has also doubled.

Hewlett-Packard Co., Videogame maker Electronic Arts Inc. and Advanced Micro Devices Inc. each have gained at least 50 per cent.

Note, however, I said the 10 "averaged" their market-beating return: Not every dog became a star. Four of the 10 fell far short of the S&P 500's overall gains, with two – Cliffs Natural Resources Inc. and J.C. Penney Co. Inc. – losing a third or more of their value.

How about Canada? Perhaps you shouldn't ask. The big losers of 2012 on the S&P/TSX Composite – the seven stocks that lost 50 per cent or more of their value – were entirely in natural resources, particularly mining.

So while the two energy companies – Enerplus Corp. and Pengrowth Energy Corp. – showed nice rebounds in 2013, the five miners gave back all their early-January gains. The "best" performer of the five, Turquoise Hill Resources, was down 54 per cent through Friday. The overall average of the seven energy and mining concerns? Down by more than a third in 2013.

In considering the strategy for 2014, then, it might be wise to hold for the short-term if you're buying the Canadian losers – depending, of course, on how you feel about the prospects for gold in the coming months. Outside of utility company Atlantic Power Corp., the 10 worst TSX Composite performers are all miners. (In fact, 18 of the 19 companies in the index that lost 50 per cent or more are miners.)

So we return to the United States, where the 2013 loser list is more varied. While the No. 1 decliner, Newmont Mining Corp., is tied to gold, there are three companies tied to health care (Edwards Lifesciences Corp., Intuitive Surgical Inc., and real estate investment trust HCP Inc.), two in the technology/telecom space (Teradata Corp. and CenturyLink Inc.) and a utility (FirstEnergy Corp.).

There are also a couple of coal miners, Peabody Energy Corp. and, making a repeat appearance, Cliffs Natural Resources Inc. Cliffs is there, perhaps, to remind us that the strategy intrigues, and seems to work rather often, but doesn't guarantee a home run every time.

-----------

S&P 500: biggest losers of 2013

Note: returns to Dec. 20, 2013. Source: S&P Capital IQ

Editor's Note: An earlier online version of this column incorrectly listed Abbott Laboratories as one of the 10 worst performers in the S&P 500 in 2013. The database used in the preparation of this story failed to adjust the stock's historical prices for a Jan. 1 spinoff to shareholders.