Simply buying the worst performers of 2022 seemed to have paid off for investors in January. The worst-to-first phenomenon, sometimes referred to as the “January effect,” occurs when the biggest decliners of the previous year lead a rallying trend in the new year. While often used to refer to small caps outperforming larger caps, the term can also refer to a trade across the board. It typically occurs as investors do away with end-of-year performance chasing and hunt for bargains, said JC O’Hara, MKM Partners’ chief market technician. CNBC Pro screened for every stock in the S & P 500 that got cut in half last year. Of the 26 names that came up, all but three are beating the market in 2023. Here are the names that made the cut and where analysts stand on where they could go from here. Shares of Warner Bros. Discovery have seen the largest bounce back in shares of the group, up 54% after a 60% tumble in 2022. Half of analysts retain a buy rating on the stock, with the consensus price target implying 39% upside. Battered technology names took a beating in 2022 as growth toppled. Since the start of 2023, Meta Platforms , Netflix and Tesla have already jumped about 25%, 22% and 43%, respectively. This month, Tesla capped off its best week in more than a decade . Earlier this month, Netflix surged after posting blowout subscriber additions in the fourth quarter . Semiconductor stocks took a beating in 2022 as companies grappled with slowing demand. But a handful of names are already leading the market in the new year. Both Nvidia and Advanced Micro Devices have risen 36% and 14%, respectively, in 2023. At least 65% of analysts rate AMD, which reports results Tuesday, as a buy, with the consensus price target implying nearly 20% upside. Of the names included in the list, Lumen Technologies , Epam Systems and Dish Network are the only three downtrodden 2022 stocks bucking the worst-to-first trend. What’s it mean? The January effect is no new phenomenon, but may hold even more value for investors after last year’s brutal sell-off. Continued strength past this seasonal period could confirm October was the low and usher in the start of a long-awaited bull market, said Ari Wald, Oppenheimer’s head of technical analysis. “This is an annual phenomenon, and I think this year in particular, it’s occurring where it should,” Wald said. “It’s not just an oversold bounce from depleting conditions. These stocks are really moving above important levels, or [fourth-quarter] peaks or 200-day average.” But stocks aren’t out of the woods just yet. Looming Big Tech earnings and decisions from both the Federal Reserve and European Central Bank could jeopardize January’s moves, O’Hara said. For the trend to remain intact, these names need to continue leading on up days and outperforming even as the seasonal trend dies down, he said. Wald said stocks that have broken above their 200-day moving average, a momentum indicator closely watched by traders, need to hold above these key support levels. While investors should take note of correlations, Fairlead Strategies’ Katie Stockton cautions against relying on them to influence investment decisions. She’s monitoring a handful of factors for signs that the market is in a long-term upward groove. That includes an improvement in long-term trend following indicators, more widespread breakouts, and greater improvement in market breadth, which is currently overbought, she said. “I think it’s encouraging, it does reflect improved long-term momentum following a very deeply long-term oversold condition,” Stockton said. “However, we would expect short-term retracement to be potentially significant and therein wouldn’t chase that.”
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