Home builder KB Home (KBH), golf equipment company Callaway Golf (ELY) and audio equipment maker Sonos (SONO) made Bank of America’s list of quality small-cap growth stocks.
“Russell 2000 Growth now looks historically cheap vs. Russell 2000 Value, and has also seen better recent revisions and better expected [earnings] and sales growth,” BofA analyst Jill Carey Hall wrote in a commentary.
But here’s the rub: “while quality is typically one of the most-rewarded styles during late cycle regimes/Fed hiking cycles, the Russell 2000 Growth has become lower quality than ever,” she said.
“Additionally, secular growth stocks tend to perform poorly late cycle, and small-cap growth also has a high weight in healthcare, where we have been more cautious.” Still, Hall sees some attractive quality growth stocks.
BofA screened stocks for quality by using earnings and some other metrics. It also chose stocks in the top quintile for at least one of the cyclical growth factors that fare well late in a cycle: estimate revisions, estimate diffusion and earnings surprise.
The bank also selected stocks in the top quintile of operating margins or year-on-year margin expansion. Finally, the stocks received buy ratings from BofA analysts.
Other stocks on the list include oil producer Chesapeake Energy (CHK), healthcare company Owens & Minor (OMI), vehicle parts maker Meritor (MTOR), hospital owner Tenet Healthcare (THC) and wood company Boise Cascade (BCC).
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