Buy these quality stocks with the economy set to slow, Bank of America says

Published Fri, Sep 24 20212:26 PM EDTUpdated Fri, Sep 24 20213:23 PM EDT

The U.S. economy is already moving into a "late cycle," so investors should buy certain quality small-cap stocks, according to Bank of America. A late-cycle economy can be characterized by peaking economic activity and slowing growth. During these time periods, quality stocks — shares of companies with strong balance sheets — tend to perform best, the firm found. In fact, high-quality stocks outperformed the equal-weighted Russell 2000 in every late cycle period since 1990, according to Bank of America's analysis. "Our work supports owning Quality – which is historically rewarded most during that phase," Bank of America's Jill Carey Hall and Savita Subramanian said in a note. The recession officially ended in April of 2020 following the breakout of Covid-19 and now, after just 16 months, the expansion could be set to slow. The economy is expected to keep trending along at about a 6% pace the rest of the year, but then take a step down to just 4% annual growth in 2022, according to economists polled by FactSet. Bank of America identified stocks in the top quintile of the Russell 2000 ranked by either high free cash flow return on assets or high return on capital — two top-performing factors during a late cycle economy. From that pool, the firm limited its list to stocks with a buy rating from Bank of America analysts. Take a look at 10 names on the list: Consumer discretionary stocks make up the bulk of Bank of America's list. Bed Bath & Beyond made headlines earlier this year, when the retailer got caught up in a frenzy of speculative trading among retail investors. However, a number of Wall Street analysts believe the company could turn around . Bed Bath & Beyond ranks in the top quintile of the Russell 2000 for free cash flow return on assets. Other consumer discretionary names to make Bank of America's list include stock photography company Shutterstock , upscale home furnisher RH and wholesale retailer BJ's . Bank of America's quality small-cap stock picks also span health care, energy, industrials, information technology, materials and real estate. Vanda Pharmaceuticals , Allegiant Travel and Northern Oil and Gas are among the other names on Bank of America's list. —CNBC's Michael Bloom contributed reporting.

Source: Bed Bath & Beyond

The U.S. economy is already moving into a "late cycle," so investors should buy certain quality small-cap stocks, according to Bank of America.