Stocks That Could Flourish as the Economy Struggles

That's not a rehash of current events; that's a sample of the blaring headlines from the summer of 1990. But despite the faltering economy and the rest of the bad news back then, scores of stocks soared during the eight-month recession from July 1990 to March 1991. The stocks that rallied had something in common: fantastic growth. Companies like Amgen, Cisco and Gap were all product or service innovators, swallowing market share by tapping into trends that no bad economy could hinder. Growth stocks as a group doubled the performance of the "value" stocks in that time, according to Morningstar.

Clearly, there are some differences between 1990 and today — most glaringly, the current credit crunch that is making banks stingy about loaning money. However, if history repeats itself, as it often does, growth stocks can excel even if the broad market continues to stumble. And if the economy avoids a deep recession, it will be "growth-stock nirvana" since these companies can increase profits even in slowdowns, says Bruce Bartlett, manager of the Lord Abbett Large-Cap Growth fund.

The best growth stocks are ones that can exploit a multiyear trend, such as increased military spending worldwide — trends unlikely to abate even as the U.S. economy struggles. In fact, more than 40% of the stocks in the Standard & Poor's 500 rose during the last two recessions, with 287 stocks moving up during the 1990-91 recession, according to the stock market research firm Birinyi Associates. They are there to find. Just don't wait too long. Growth is as rare as a diamond, and everyone is looking for it, says Dan Becker, manager of the Waddell & Reed Advisors Vanguard fund.

Luckily for investors, this time many of these potential growers have room to run. They were ignored for the past five years as investors fawned over cyclical commodity and industrial companies — stocks that greatly benefit from expanding economies. That has created a good chance to make money with growth stocks, Becker says, even as the broad market falters.

But a word of caution: There's nothing scarier than a growth stock whose growth fails to materialize. Investors who went through the tech bubble can attest to that. So it's worth keeping a close eye on the foundation behind a company's growth prospects. And few firms will be left unscathed if the U.S. skids into a deep recession and takes the rest of the world down with it. But these innovative growth companies should fare better than other stocks if it gets that bad and excel under any other circumstances. In the end we found five stocks that you might want by your side — in good times or bad.

Even with a price to expected 2008 earnings ratio of 26, the stock is still attractive to Eric Fischman, manager of the MFS Emerging Growth fund. He says there are not a lot of companies in the market today that he has a high degree of confidence in to generate almost 20% earnings growth, "not for a year or two but for a long time."

Since this is an election year, some analysts do worry that a new U.S. administration will cut the $440 billion annual defense budget. However, the sector's stocks have outperformed the S&P 500 in seven of the past eight election years. Raytheon's stock has nearly tripled since 2001 but has been outpaced by rivals such as Lockheed Martin, whose shares have more than quadrupled. For a while the company's rivals expanded their profit margins faster, but Raytheon has caught up. Cai Von Rumohr, defense analyst for the investment bank Cowen, expects Raytheon to outperform the broader market by 15%, thanks in part to its $3 billion cash hoard, which can be used for stock buybacks.