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(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

At the end of every year tax loss selling and window dressing push some stocks down too far. Investors are looking to take losses on stocks to offset gains on other stocks for tax purposes. Portfolio managers are looking to unload their losers before they have to report their positions on December 31 to give the appearance they didn't make any big mistakes.

The selling pressure from both groups abates in January after the close of the year because it is too late to hide losses or reduce 2013 taxes. These stocks often rise as few are left who are willing to sell at the steeply discounted prices. Hence the term the January Effect. Sometimes the selling pressure last until December 31 and sometimes buying pressure begins to move the stocks up before December 31 in anticipation of the January Effect.

Petroquest (NYSE:PQ) is a natural gas driller that has been slow to transition into primarily an oil driller. However, in 2013 they began the transition and in 2014 oil production will start to grow towards 30% of total production. Petroquest has a market-cap of $267 million and annual sales of $167 million. Between the recent rise in natural gas prices and the transition to oil drilling, Petroquest could see 2014 revenues rise to close to its existing market-cap. Most high flying oil and gas stocks trade for several times their annual sales revenue. While $425 million is a lot of debt for a company the size of Petroquest, it has a lot of natural gas assets that have been written off due to low natural gas prices. The cold start to winter and the recent rise in natural gas prices could bring back a lot of hidden value in Petroquest's natural gas assets.

One of the most beaten down oil stocks in 2013 is Halcon Resources (NYSE:HK). The company has a GAAP accounting book value of $1.85 billion. Yet despite writing off everything but the kitchen sink the stock is still trading at only 85% of book value. That book value is heavily weighted towards oil and gas production and leases in the Bakken Shale, Utica Shale, and the eastern part of the Eagle Ford Shale. Many of those leases, especially in the Utica Shale, are selling for more than Halcon invested in them. This creates an attractive entry point for investors. It should be noted Halcon has taken on $3 billion worth of debt, which is a lot relative to its size. It is looking to sell non-core assets to reduce its debt burden. Halcon would be vulnerable to a sharp and unexpected drop in oil prices due to its debt levels.

Another beaten down oil and gas stock is EXCO Resources (NYSE:XCO). The company has a market-cap of $1.1 billion. EXCO Resources recently acquired 55,000 net acres and farm in rights for an additional 147,000 net acres from Chesapeake Energy (NYSE:CHK) in the Eagle Ford. The deal includes a complex partnership with Kohlberg Kravis & Roberts. The market doesn't seem to like the deal and has sold off EXCO Resources' stock, causing the company to accept the CEO's resignation. But the stock market seems unaware that EXCO Resources could be sitting in the Buda sweet spot based on its acquisition from Chesapeake. In the Buda sweet spot one oil well reached pay back in six weeks and produced over 300,000 BOE in its first 12 months. Buda wells cost less to drill than shale wells because they do not require expensive fracture stimulation completion techniques. EXCO Resources has thousands of acres to drill just to the west of the proven Buda sweet spot.

U.S. Energy (NASDAQ:USEG) is yet another beaten down oil stock with lots of potential upside. U.S. Energy has a GAAP accounting book value of $110 million with very little debt relative to its size. Most of the company's book value comes from producing oil wells and leases in the Bakken Shale and Eagle Ford Shale. But what makes U.S. Energy compelling is its 30% working interest in the leases and production in the Buda sweet spot operated by Contango (NYSEMKT:MCF). The article Contango Is Sitting On A Buda Oil Bonanza gives many details on the value of the Buda sweet spot to U.S. Energy and Contango. So far Contango and U.S. Energy have announced three very successful Buda wells with rates of return well over 100%. As detailed in the article the first Buda well they drilled reached pay back in less than four months. The second two wells they drilled had initial production rates that were higher than the first well. While U.S. Energy is a deep value play because of its Bakken and Eagle Ford assets, the Buda wells it is drilling with Contango could also make it one of the fastest growing oil stocks in 2014.

The above offers a snapshot of all four companies and investors should do their own due diligence to gain additional information on each stock. All four are beaten down to the point that they are not only worthy of consideration for a short term trade based on the January Effect, but also of a longer term investment. All four stocks mentioned are heavily dependent on the price of oil and any sharp down turn in oil prices would negatively impact these stocks.

January Effect stocks sometimes see most of their near term appreciation in January. At other times, especially if they have continuing good news to announce, the appreciation in the stocks is just getting started in January. Investors in the above four stocks need to keep an eye on oil prices. As long as the price of oil holds up they should consider giving the stocks time to maximize their appreciation potential.

Source: 4 Oil Stocks Set To Benefit From The January Effect