(MONEY Magazine) – It's a well-known stock market phenomenon, sometimes called the January effect: Depressed shares often rebound near the end of the year and continue advancing for the first week or two of January. And analysts think it could be especially pronounced this winter. "Whenever stocks have struggled for the first three quarters of the year -- as they have in 1994 --the January effect is more powerful and begins earlier," says L. Keith Mullins, managing director of Smith Barney's small-growth-stock research. The year-end bounce is typically greatest for volatile stocks, such as the shares of small growth companies. These issues may be riskier than average because they trade at high price-to-earnings ratios. But for investors who are willing to take such risk, the reward can be substantial -- extra profits of 10% or more. Why does the January effect occur? Essentially, investors tend to weed disappointing stocks out of their portfolios as the end of the year approaches, driving down prices to attractive levels. "For one thing, people sell poor performers so they can take tax losses," explains James R. Solloway, director of research at Argus Research in New York City. "Then when a new tax year starts, a lot of depressed companies rebound." Here are five volatile stocks that have fallen more than 30% over the past 52 weeks. Analysts think they are likely candidates for a year-end bounce, followed by continued strong performance over the next 18 months. The stocks are discussed in order of their potential gains. -- Newbridge Networks (ticker symbol: NN; recently traded on the New York Stock Exchange at $32.50 a share; no yield). This Canadian company in Kanata, Ont. has turned in explosive growth since 1992, expanding at 70% to 80% a year. Newbridge (estimated 1994 revenues: $615 million) supplies high-tech switching equipment to most of the world's largest telephone companies. The stock has fallen 55% from a $72 high within the past year, in part because first-quarter earnings were slightly disappointing and the company had failed to give advance warning to analysts. "Investor confidence was shaken by management's handling of the first-quarter shortfall," says analyst Stephen Koffler at NatWest Securities in New York City. Nonetheless, some stock pickers think Newbridge has the potential for a major rebound. "The stock is cheap as hell," says Mullins at Smith Barney. Even analysts who think the company is having growing pains project earnings increases over the next three years at a 30% compound rate. Newbridge trades at less than 18 times analysts' estimates of next year's profits, and Mullins thinks the stock could rally 57% to $51 within 18 months. -- Owens-Corning (OCF; NYSE, $33.75; no yield). The leading maker of fiberglass insulation, $3.1 billion Owens-Corning continues to control half the market for home insulation, even though newer products have found greater favor with environmentalists. Not surprisingly, as mortgage rates rose this year, slowing home sales, Owens-Corning stock declined 31% from a $49 high. The shares also have long been depressed by the company's backlog of nearly 100,000 asbestos liability cases. "You say asbestos and everybody gets scared -- that's one reason the stock is at 8.5 times earnings," says analyst Jerry R. Herman at Kemper Securities in Chicago. Analysts say, however, that the firm has adequately reserved funds and bought insurance to cover likely future liability costs. Also, Owens-Corning's legal position has improved somewhat. "Recent judicial rulings hold that people have to show they have actually been impaired by asbestos to get paid," says analyst Jonathan Goldfarb at Merrill Lynch. Owens-Corning's business is now at the highest levels since the 1990-91 recession ended. Moreover, analysts say, the company's biggest gains will come ( when international sales recover. Herman figures that a swing back to peak foreign earnings could add as much as $1.80 a share to yearly profits. Over the next 18 months, the analysts see the stock topping $50, a 48% gain from here. -- Cott (COTTF; NASDAQ, $14; 0.6% yield). With $727 million revenues, this Toronto company is the leading maker and distributor of high-quality store- brand soft drinks both in North America and overseas. An investor favorite in 1993 that traded at price/earnings high enough to cause nosebleeds, Cott has since dropped 63% from a $37.75 high because its annual growth rate slowed from 100% to 50%. "With these momentum stocks, a couple of weaker quarters cause the P/Es to collapse," says Oppenheimer analyst John M. O'Neil. Now trading at only a 16.5 P/E, Cott looks like a tempting buy. For one thing, says O'Neil: "Retailers are making greater use of store brands." And analyst John C. Maxwell at Wheat First Butcher Singer in Richmond notes that many of the colas that Cott distributes are made by the company that owns Royal Crown cola, using a similar formula. "There are only three excellent cola formulas in the world -- Coke, Pepsi and Royal Crown," says Maxwell. The analysts think the stock could reach $20, a 43% gain from here, over the next 18 months. -- Whole Foods Market (WFMI; NASDAQ, $14.25; no yield). The largest retailer of natural foods with annual revenues of $389 million, Whole Foods has 34 stores nationwide, 11 of which are in California. "They lost momentum because of the California earthquake earlier this year, but basically business is great," says analyst Jonathan Cohen at Smith Barney in New York City. Nonetheless, the stock is down 45% from a $25.75 high. So-called natural foods are produced without the use of pesticides, chemicals, hormones or preservatives and tend to be low in fat and cholesterol. The $6.5 billion business is only 2% of total U.S. food retailing, but it is growing at 15% a year. "Every time there's a food scare, you see a spike up in sales," says analyst Dennis C. Van Zelfden at Rauscher Pierce Refsnes in Dallas. And Whole Foods, the industry leader, is expanding even faster. With a 20%-plus growth rate, the stock is now quite reasonably priced at about 18 times next year's earnings, according to analysts. "Once investors start to see next year's results, the stock will probably rally to the $20 level," says Matthew Patsky at Robertson Stephens in San Francisco. That would mean a 40% return from here.

-- Bed Bath & Beyond (BBBY; NASDAQ, $23.75; no yield). With 51 superstores, this $425 million company is the leading specialty retailer of towels, bedding and other home textiles. "They have a great niche between upper-end retailers of home furnishings such as Williams-Sonoma and discounters like Wal-Mart," says Solloway at Argus. Nonetheless, the stock is down 33% from a $35.50 high late last year. One reason: Many analysts think the firm has too much inventory. Prudential Securities analyst Amy E. Ryan disagrees: "The inventory isn't a problem. It's all out on the floor, and a lot of it is for the holiday season," she says. "With good Christmas sales, the inventory will drop back to normal." Moreover, Ryan notes, earnings have been growing quite nicely and could continue rising 25% to 30% annually. The analysts say the stock, which trades at 22.6 times next year's projected profits, could rebound at least 30% to the low $30s.

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