There's something of a consensus forming on Wall Street that says investors should take a good, long look at "quality" stocks.
The market seems to have shaken off its fear that Chinese real estate lender Evergrande was going to be the start of a global debt crisis. But even so, there's been a rising sense of nervousness in the market in recent weeks as experts note how long it's been since stocks sold off in a major way - even though time alone doesn't make those sales happen.
Investors' worries about a downturn have prompted them to buy companies that have a history of low debt, financial health, steady earnings, and stable profits on the theory that company performance and stock performance will hold up better if things go south.
Goldman Sachs recently pointed out some of its large-cap quality picks, and now Bank of America is doing the same for smaller- and medium-size companies. Equity and quant strategist Jill Carey Hall writes that that call makes sense because of economic conditions as well as that undercurrent of investor nerves.
"Our team's US Regime Indicator - which has continued advancing through "Mid-Cycle" throughout 2021 - ticked down in August," she wrote on Wednesday. "If it declines again in Sept., this would suggest a shift to Late Cycle."
Among those small- and mid-cap companies, Carey Hall says that investing based on quality has an incredible track record.
"High Quality stocks have outperformed the equal-weighted Russell 2000 index 100% of the time in Late Cycle regimes since 1990," she wrote. The two best quality factors are return on capital and free cash flow return on assets.
The stocks below all have "Buy" ratings from Bank of America's analysts, and they're among the top 20% of Russell 2000 stocks in one of those two categories, which suggests they'll do well in the late-cycle environment Carey Hall identified.
A select few stocks rank in the top quintile in both factors. Those are Rent-A-Center, RH, Cactus, HealthEquity, TTEC, and Enphase.
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