2 Ways to Beat the Recession With Stocks

The blame game is a funny thing. Everybody plays it, and nobody wins.

Last week, BusinessWeek weighed in by pinning part of the blame for the forthcoming recession on consumers. The magazine's chief economist, Michael Mandel, says that we've run up $3 trillion in borrowing and spending over the past 10 years, artificially stimulating an economy that, according to official statistics, had grown by 2.7% a year over the same period. A good number gone bad, you might say.

And it got me thinking about my portfolio. If Mandel is right -- if growth really did vanish that quickly -- then how do I know my stocks are safe? Don't they need growth?

China. Freaking China.
Yes, they do, and it's going to be harder to come by now. So worried are the feds that Treasury Secretary Henry Paulson last week praised China, which he said will "continue to be an important engine for global growth." Baidu.com (Nasdaq: BIDU  ) investors would probably agree. The Chinese search star improved revenue and net income by 85% and 91%, respectively, during the third quarter.

Mandel, meanwhile, offers bitter medicine on the home front: "U.S. companies have to pay more attention to sustaining productivity growth and innovation at home rather than resorting to outsourcing as their main source of cost savings. That would boost wages and incomes for U.S. workers and reduce the need for the U.S. to take on huge debts to pay for foreign-made goods."

I added the emphasis, so you'd notice that he stresses innovation. Mandel would later sharpen his assertion to emphasize "biotech and energy." I'll add information technology, since software has classically been the tool by which workers obtain personal productivity gains. Businesses, too, are still relying on software -- even if Microsoft's (Nasdaq: MSFT  ) latest earnings report was about as blase as its "I'm a PC" ads.

When in doubt, sell painkillers
A weak economy offers no guarantees. Mandel is right -- a recession favors the innovative. That means slow-growth borrowers such as Domino's Pizza (NYSE: DPZ  ) and Revlon (NYSE: REV  ) could be headed for pain.

So convinced are we of the importance of innovation that my Rule Breakers teammates and I recently visited Silicon Valley to unearth the area's best stock ideas. We met with established rebels such as InterMune (Nasdaq: ITMN  ) . We also met with the visionaries behind the Valley's big ideas, including Dilbert creator Scott Adams and former Mac evangelist Guy Kawasaki, whose latest venture, Alltop.com, aims to be the first viable alternative to Google (Nasdaq: GOOG  ) .

What we heard in these meetings is a no-brainer but worth repeating anyway: The way through a recession is to build what customers can't live without. Benchmark Capital's Bill Gurley told us that he's counseling his portfolio companies to ditch "nice-to-haves." Sequoia Capital's partners would probably agree; its 10 signs of a sustainable grower includes an emphasis on "painkillers."

There are two types of business pain that innovators address:

  1. Costs and inefficiency. When oil hovered above $140 per barrel in July, SunPower (Nasdaq: SPWRA  ) and its sun-soaked peers grabbed headlines daily. Cloud computing makes news now, because it's cheaper to maintain than a roll-your-own IT infrastructure. 
  2. Competitive disadvantage. Some technologies put you at a competitive disadvantage if you don't have them. Windows used to be the pinnacle here. These days, I vote for Google's advertising platform. An executive we met with convinces me. First, he said advertising was "dead." So I asked him about Google; Would he be cutting search ads, too? His response: "Well, you have to have that, right?" Right.

Be a Fool for innovators
Estimates vary for how long a recession will last, but most experts seem to agree that you absolutely should not stop investing, especially if you're 10 or more years from retirement. Now is the time fortunes are made. My money is with the companies selling tech painkillers -- companies that call Silicon Valley home.

If you'd like to get the full story on what we discovered during our rebellious trip west, as well as full write-ups of each company we visited, simply click here, enter your email address, and we'll send you all of our dispatches, absolutely free.

Fool contributor Tim Beyers had positions in the shares and LEAP options of Google at the time of publication. He also hunts for the best of tech as a member of the Motley Fool Rule Breakers team, whose recommendations include Baidu.com, Google, and InterMune. Microsoft is an Inside Value selection. The Motley Fool's disclosure policy wonders who this Jack Handey guy is, and why does he have so many deep thoughts?


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