Comeback kids of the 4th quarter

Which stocks could put on strong year-end performances?

By InvestorPlace Oct 4, 2012 10:41AM

By Jim Woods

iplogoIf you look at the major averages this year, you can see that despite a host of strong headwinds -- a marked slowdown in China's GDP growth, recession in Europe, anemic U.S. GDP and employment growth -- stocks have been very, very good to the bulls.

Just look:

Index     Q3 returns     YTD returns
Dow Jones     5%     10%
S&P 500     6.3%     14.6%
Nasdaq     6.5%     19.5%
Nasdaq-100     7.2%     22.6%

The driving force behind the third-quarter gains -- and, by extension, the gains so far in 2012 -- was the anticipation of central bank action in U.S. and, more importantly, in Europe. The Fed's QE Infinity pledge to keep buying $40 billion worth of mortgage-backed securities for an unlimited period was even more than most bulls could hope for, and the anticipation of more easy money from the Fed helped stocks soar.

But from what I've gathered from conversations with floor traders and hedge fund managers, expectations that the European Central Bank would finally implement concrete plans to purchase bonds via OMT, or outright monetary transactions, was an even bigger catalyst sending stocks higher.

Of course, not all stocks have participated in the wider surge. In fact, so far in 2012 there have been a host of great companies that have failed to gain favor from the smart money. For both traders and investors, identifying the relative laggards with a chance of making a comeback could be the key to finding great opportunities.

If stocks do what they've done in the past, then we could see a post-election rally -- and a Santa Claus rally that could lift many of the market's beaten-down issues higher.

So which stocks should investors look at as potential comeback kids during Q4?

Research In Motion (RIMM) has been one of the least-loved fallen stars for many years, and so far in 2012 its shares are down nearly 48%. However, over the past month, RIMM shares have mounted a monster comeback, spiking more than 25%.

Solid earnings in the most recent quarter, as well as optimism over the company's next-generation smartphones, could keep this stock's upward momentum going until the end of the year.

Abercrombie & Fitch (ANF) knows better than anyone that fashion is a fickle handmaiden. Over the years, we've seen how volatile teen retail stocks can be. This year, Abercrombie & Fitch has been the victim of changing tastes, as the shares are down more than 30% in 2012.

Yet with every holiday shopping season there's a chance at redemption, and with every battered issue comes a shot at a comeback. Recent bullish options action in ANF suggests the stock might already have bottomed, and that perception could be the catalyst ANF shares need to make a run higher in Q4.

Want to know what other names are poised for a strong finish to 2012? You can check out the full list of comeback kids here.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

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