With blue-chip stocks reaching all-time highs, it was inevitable money would flow from investors' pockets into small-cap stocks.
Since the Reserve Bank of Australia began its easing bias back in 2011, high-yielding stocks have been in vogue. Now, the RBA looks likely to increase rates. So what does that mean for shareholders and investors?
It means nothing new. Interest rates will eventually rise as confidence grows and that means more money will continue to flow into stocks, not out of them. However term deposits, bonds and interest accounts will again be comparable to the dividend yields offered by stocks.
Although blue-chips like Woolworths Limited (ASX: WOW) and National Australia Bank Ltd (ASX: NAB) will continue to be in demand, their valuations have become stretched and more investors are realising it, in conjunction with rising rates, valuations are not sustainable.
As a result of the continued demand for shares and years of underperformance in smaller companies, it finally appears the year of the small-cap has arrived.
So far in 2014, there have been a number of stocks which have exemplified this thesis. My top stock pick for January is a perfect example. The tiny healthcare and technology innovator, Global Health Limited (ASX: GLH) has increased by 113% already. Not a bad return for the quarter.
Two other top performers in 2014 have been Liquefied Natural Gas Limited (ASX: LNG) and Donaco International Ltd (ASX: DNA), up 94% and 61% respectively. Both are continuing to set in place long-term strategies in their respective industries. LNG is putting together all the pieces of the jigsaw that are required to be a junior gas producer in the United States while Donaco will complete the final works on its revamped hotel and casino in 2014.
Another superstar is Yellow Brick Road Holdings Ltd (ASX: YBR). After spending much of 2014 dormant, management recently released a statement saying it would begin share buybacks and yesterday announced the possibility for acquisitive growth in the near future. Its 17% jump in value yesterday puts it 13% above its first traded price of 2014.
In further evidence that small-caps are in demand. Collins Foods Limited (ASX: CKF) has managed to remain 5% above its open on January 2, despite releasing a lower FY14 profit guidance earlier in the year. Since falling to $1.82 last month, the stock has recovered back to $1.93.
Foolish takeaway
One of the joys derived from investing in small-caps is that there are so many to choose from. Your choices aren't confined to 10, 20 or even 50 stocks. Although it seems easy to make money investing in small-caps, it can be easier to lose it. Nevertheless these continue to track along nicely and I expect them to continue to beat the market throughout 2014. Put them on your watchlist.
