Citi Research published a new research report today titled “Small/Mid Cap Topics: Reflecting on ’13, Inflecting to ’14.” Citi analysts Scott Chronert and Louis Odette authored the report, and make a strong argument that there is still room to run for many small and micro-cap stocks despite a very strong performance in 2013.

Small and Micro-caps 2013

Both small and micro-cap stocks put in outstanding performances in 2013, with small caps leading the way. The iShares Russell Micro-cap Index (ETF) (NYSEARCA:IWC) produced a scintillating 45.7% total return for the year, followed by the Russell 2000 (INDEXRUSSELL:RUT), the Russell 2500 (INDEXRUSSELL:R25I), Russell Mid Cap and the Russell Top 200 (32.4%). The Russell 2000 index racked up its fourth best year since the index was created, and the 38.2% increase for the year represented the biggest gain in the last decade.


History says small cap bull run can continue

Chronert and Odette highlight the strong performance of small caps in 2013 in their report, but argue that the big run up does not necessarily mean a reversion to the norm in 2014. The analysts point out that historical data show that it is not unusual for small caps to go on mega multi-year runs. “For further historical context, it is not uncommon for the SMID indexes to follow such performance with further gains.”

Micro-Caps 2

Projections for 2014

The Citi report suggests that investors will be well served to focus their positions in specific sectors and specific stocks within the selected sectors in 2014, rather than playing the broader indices. The analysts also point out that there is still significant macroeconomic risk with regard to the Fed taper, and that SMID indices are approaching the high end of historical ranges.

The report highlights the health care, consumer discretionary and industrial sectors as the top performing sectors in 2013, while financials, materials and utilities were underperformers. The analysts also say that sector rotation is likely in 2014, and that stock selection is just as important as sector selection. In conclusion, Chronert and Odette project 16% to 18% growth for SMIDs in 2014, assuming 3% annual U.S. GDP growth for the year.