These 12 highly shorted stocks have suffered brutal losses this year - but one Wall Street firm says a major threat just passed, and it might be time to buy

Brendan McDermid/Reuters

• Julian Emanuel, chief equity and derivatives strategist for BTIG, says November could be the start of a turnaround for stocks that have struggled badly in 2019.
• Emanuel says mutual funds have been badly-performing stocks like these for tax reasons - a process that's going to diminish because October 31 was the end of their fiscal year.
• For that reason, some stocks that have fallen dramatically and have a lot of short interest could begin to recover now. Emanuel calls that a rare opportunity to find additional upside after this year's big rally.
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Timing is everything, and that could work in favor of some of the worst-performing stocks of this year.

Julian Emanuel, chief equity and derivatives strategist for BTIG, says some of the most-shorted and worst-performing stocks on the market are positioned for a reversal now that the calendar has flipped to November.

"We believe now is the time to focus on laggards at the single stock level," he wrote in a note to clients.

The reason for his prediction is tax loss selling, or the selling of assets that have lost value in order to offset taxes owed on better-performing assets. It's especially important right now, according to Emanuel, because the fiscal year for mutual funds ended on October 31, so many of them have just finished their tax loss selling for the past year.

Emanuel says the passing of that milestone will remove pressure from some stocks that have been struggling. He says the selling could naturally fade now, and in other cases, the stocks could benefit as investors reduce their exposure to the market and cover their short positions.

With the benchmark S&P 500 index up almost 23% this year, there aren't that many losers on the stock market this year. That means it's a little easier to identify the stocks that could rally as tax-selling fades. Emanuel says it's an important want to find upside potential in the wake of the surge in stock prices.

"With both volatility and correlation remaining low, single stock ideas (rather than sectors or styles) are likely to drive further upside into 2020, particularly if positioning can act as a catalyst," he said.

With that in mind, Emanuel says these 12 stocks might be ready to rally. Each has a market capitalization of at least $500 million and a share price of $5 or more. They all have substantial short interest, and each has traded substantially lower this year.

The 12 stocks are ranked in increasing order based on how far they've fallen in 2019: