Stocks for the Downturn

The spring of 2002 was a tense time for investors. Over the previous 12 months or so, they had experienced the bursting of the tech bubble and the terrible impact of the Sept. 11 tragedy. In April 2002, the country was still recovering from a recession. And the S&P 500 would fall by 23% over the course of the year. Even seemingly stable large-cap companies such as Microsoft (Nasdaq: MSFT), General Electric (NYSE: GE), and Citigroup (NYSE: C) saw their valuations plummet.

It was not a good time to be an investor. Or was it? Our Motley Fool Stock Advisor service was launched at that time, and despite a rocky start, every issue offered a pick that is now beating the market or beat the market until we recommended selling it.

What's more, several of the selections have delivered multibagger returns for Stock Advisor members. How did advisors David and Tom Gardner find great stocks in such a tough market environment?

Portrait of a multibagger
Three of the top-performing and still-active recommendations from Stock Advisor's first year are listed in the table below:

All three had a number of things in common.

1. They were not obviously cheap in 2002.
2. All three were relatively risky when compared with the broader market.
3. All three companies had strong underlying businesses capable of generating growing cash flows over the long term.

Back in 2002, for example, Marvel was a beaten-down company that was able to grow its revenue by 65% that year. Moody's, according to Tom Gardner, was a company with strong cash flows and no long-term debt. As for Amazon, David Gardner saw it as a great company at a premium price with enormous potential to dominate its niche in Internet retailing (and generate free cash flow down the line).

If you can keep your head ...
The experience of these three investments can teach us a lot about investing in today's difficult market. First, forget about timing the market. David and Tom went ahead with these selections despite the challenging conditions of 2002. Were things worse then than now? I have no idea. For long-term investors, it shouldn't matter anyway .

Second, look for great businesses above all else. Yes, valuation matters -- a lot. But great businesses with growing cash flows should perform very well for investors over the long term. Five years from now, we may or may not remember the ins and outs of the subprime crisis and the resulting credit crunch. But it's very unlikely that you'll forget any multibaggers you've earned by selecting great companies and ignoring the market noise.

Five years from now begins today
Now is just as good a time to invest for the long term as any other time. If you can focus on great businesses and avoid timing the market, you should be able to find promising stocks, even in a downturn.

If you need a few new ideas, join us at Stock Advisor. In the past two months, David pulled the trigger on two of America's most revered companies that just happen to be trading at discounts. Click here for a free 30-day trial -- you can read about those recommendations and all of the other companies we like for new money.

John Reeves doesn't own shares in any of the companies mentioned. He feels an English friend of his got it right when she said, "I hate recessions. They're so boring." Microsoft and Moody's are Motley Fool Inside Value recommendations. The Fool has a disclosure policy.