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:
Horace Mann Educators
Founded in 1945 by two teachers in Abe Lincoln’s own Prairie State of Illinois, Horace Mann Educators (HMN) is an $8.5 billion national multiline insurance company. It caters to public K-12 teachers, administrators and their families in the US and is expected to grow 14% by 2020. As of 2013, some 6.2 million students attended K-12, supported by personnel totaling 2.6 million and 298,879 administrators. Another 412,992 college students are planning to become teachers, and 1.2 million are retired. Combined third-quarter assets combined amounted to $8.5 billion, increasing 4.9% year-over- year.
Realogy (RLGY), a real estate and relocation services company with ties to 104 countries, including the United States, is the parent company to Century 21, Coldwell Banker and Sotheby’s (BID) International Realty. In 2012, Realogy was a part of approximately 26% of all existing domestic transactions involving a real estate firm. Third-quarter 2013 revenue soared 21.2% to $1.55 billion, buoyed by a 29% surge in year-over-year home sale transactions. The company sees that figure growing between 17% to 19% in 2014.
Back in June, molecular diagnostics company Cepheid (CPHD) gained FDA approval for its updated Xpert MRSA/SA BC test (part of its popular GeneXpert system). The test detects infections in blood specific to causes of sepsis in hospitalized patients. The $2.7 billion company reported third-quarter 2013 revenues of $100.1 million, a 24% increase over the same quarter a year ago. Cepheid offers the most popular molecular diagnostic platform on the market; its stock has performed admirably, up 25% over the past six months.
Unlike Dr.Koop.com, which went from an IPO darling to out of business two years later, WebMD (WBMD) has survived by diversifying its income sources. While 2012 did not bode well for the company, it has since turned around. It revamped its advertising strategies and significantly cut costs. The stock is up a staggering 144% in 2013. WebMD is expected to turn a profit this year with earnings forecast to rise 131% to 60 cents a share in 2014.
Fast-food restaurant chain Wendy’s (WEN) is up 78% year-to-date thanks to a revamped menu and remodeling of stores that began Feb. 21. Some 57% of the 2013 growth happened since that date. Shares have risen from $5 per share at the end of 2012 to $8.37 today; plus it yields a 2.4% dividend. The company recently raised its guidance for full-year 2013 and earnings are expected to grow at an average rate of more than 16% a year for the next five years or so.