Tax-loss selling is likely to lead these 20 stocks to become artificially depressed in the fourth quarter - and therefore good bets to bounce back in the new year

Stocks that are beaten down by tax-loss selling in the last quarter of the year often rebound in January.

Now is a good time to start preparing for one of the highest-probability short-term trades of the year.

I'm referring to buying stocks that are beaten down by tax-loss selling in the last quarter of the year, which far more often than not rebound in January after that selling has abated. Jeffrey Hirsch of the Stock Trader's Almanac refers to this strategy as "Wall Street's Only 'Free Lunch.'"

Tax-loss selling, of course, is the practice of selling stocks held at a loss in order to offset any capital gains that investors may have realized earlier in the year. That reduces the capital-gains tax they would otherwise owe when filing their taxes the subsequent April 15.

Take the success of this tax-loss selling strategy one year ago. A group of 20 tax-loss selling candidates that I presented then gained an average of 39.6% from their lowest closes in the fourth quarter to their highest closes in January (according to LSEG data). The comparable gain for the S&P 500 SPX is 6.6%.

To be sure, you would have needed remarkable clairvoyance to achieve this 39.6% average return, since only in retrospect could you have known when these 20 stocks were registering their fourth-quarter lows or their January highs. But this impressive hypothetical return does illustrate the potential of this tax-loss selling strategy.

Nor was last year's experience a fluke, as a similar story was told in most prior years as well. Consider a group of tax-loss selling stocks I produced two years ago, at the beginning of the fourth quarter of 2024. They gained an average of 20.9% from their fourth quarter 2024 lows to their highest closes in January 2025 - versus 7.2% for the S&P 500.

To produce past years' lists, I simply took the 20 stocks with the worst year-to-date returns near the end of the third quarter. My rationale was that many of the investors owning these stocks were holding them at a significant loss, which meant they were obvious tax-loss selling candidates. This year's list appears at the bottom of this column.

You might wonder if late September is too early to be focusing on tax-loss selling, on the theory that it would be concentrated in December. But it's not, since mutual funds are required to use Oct. 31 as the end of their tax year. Their tax-loss selling will therefore be concentrated in just the next several weeks, and the funds collectively are so large that their selling will have a significant impact on various stocks' prices.

A good approach to the stocks listed below is to place buy limit orders well below their current prices. If, as expected, tax-loss selling causes their prices to fall markedly, many of your buy orders could very well get filled. Odds are good that, as a group, the stocks that satisfy your buy limits will be significantly higher in January.

Included in the list below are only those stocks with market caps above $100 million. They are listed in ascending order of their year-to-date returns.

 
Ticker  Stock                  Market Cap ($ millions)  YTD (thru 9/18) 
WSHP    WeShop                 $139.2                   -94.3% 
SION    Sionna Therapeutics    $271.3                   -85.5% 
VRRM    Verra Mobility         $536.5                   -84.5% 
ZSQR    Z Squared              $142.0                   -81.2% 
UPB     Upstream Bio           $296.9                   -80.3% 
EYPT    EyePoint               $333.6                   -78.9% 
MVST    Microvast              $249.5                   -77.2% 
VERI    Veritone               $111.5                   -76.3% 
SSTK    Shutterstock           $167.7                   -75.1% 
LENZ    LENZ Therapeutics      $129.5                   -74.6% 
YSS     York Space Systems     $1,174.4                 -74.6% 
WVE     Wave Life Sciences     $874.9                   -74.4% 
UP      Wheels Up Experience   $129.9                   -72.7% 
ORGO    Organogenesis          $181.4                   -72.6% 
ADCT    ADC Therapeutics       $134.1                   -70.3% 
SES     SES AI                 $200.5                   -70.0% 
IVVD    Invivyd                $246.1                   -69.4% 
UWMC    UWM                    $2,009.4                 -69.4% 
CAPR    Capricor Therapeutics  $531.4                   -68.6% 
BRCB    Black Rock Coffee Bar  $324.9                   -67.7% 
                                                        Source: LSE 

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert