Inarguably, small-cap stocks have been the heroes in 2013 as illustrated by the Russell 2000 (IWM), an index comprised of the smallest companies on the NYSE. Up 32.2% this year, the index outshined its larger counterparts the S&P 500, up 25.2%, and the Dow Jones Industrial Average, up 20.7%.
If you think small caps will transition from heroes to dogs as we start a new year due to higher interest rates, you are sorely mistaken. In fact, contrary to popular belief, there hasn’t been a correlation between rising rates and small-cap underperformance for the past several decades.
Since the inception of the Russell 2000 in 1979, small-cap stocks have performed better than large-cap stocks when rates rose. Not only that; they actually appreciated more in rising rate climates than in declining ones.
If that doesn’t convince you that the little guys won’t face headwinds in 2014, here’s another fact that might. In the past 35 years, the Russell 2000 has shown up the S&P 500 in December, January and February, considered “the sweet spot” for small-cap stocks.
History also tells us that the past 12 months of high valuations for small caps (20 times earnings), shouldn’t be harmful either. Since the late 1970s, four periods have passed with similar valuations, and the Russell 2000 went higher three in three of them, according to Citigroup.
So here are five small-cap stocks with tailwinds behind them for 2014: