Now that it looks like we're in an economic downturn, we asked ourselves, "What types of companies do we want to own?" Should we load up on defensive stocks? Should we look for outstanding companies at great prices? Or do we stay out of the market altogether?

In order to get after these questions, we decided to run a screen for the top 10 best-performing domestic stocks since the beginning of our last recession, which occurred between March and November of 2001. Our screen looked for domestic stocks that were valued above $250 million and traded on the major exchanges -- stocks the individual American investor would have been likely to actually buy.

Let's speculate
Would the winners be "recession-proof" companies whose products will still be in demand during times of turmoil? According to data by Standard & Poor's, the best stocks to own when the going gets tough are in defensive sectors like consumer staples, utilities, financials sectors, and health care (including big pharma), each of which has outperformed the market 80%-90% of the time during recessions.

By that line of thought, consumers may decline to make big-ticket purchases like a car. Indeed, General Motors (NYSE:GM) has hit lows it hasn't seen for 50-odd years, partly because sales are slumping. Consumers are far less likely to skip filling their prescriptions every other month just to save a few bucks. Thus, drugmakers and insurance providers -- even beaten-down ones like Pfizer (NYSE:PFE) and UnitedHealth Group (NYSE:UNH) -- should weather a downturn better than makers of discretionary consumer goods.

We also wondered whether profits would unravel at fancy-pants retailer Abercrombie & Fitch (NYSE:ANF) as shoppers switch to cheaper clothing peddlers like Wal-Mart (NYSE:WMT).

Or perhaps mopey investors would turn to the bottle, downing shares of Diageo, maker of Smirnoff vodka, Johnnie Walker whisky, and the ever-tasty Guinness stout, among many other booze brands. Unsurprisingly, sales of alcoholic beverages have traditionally held up pretty well when the stock market hits rock-bottom.

Overall, we were a bit surprised by the results.

One word, Benjamin: Energy
The top 10 performers since the beginning of the last recession are listed below (and their performance during the recession is included in column 3):


3/1/2001 Market Cap

Return 3/1/2001- 11/1/2001

Return 3/1/2001-7/6/2008

Ultra Petroleum

$285 million



Southwestern Energy

$262 million




$3,024 million



Walter Industries (NYSE:WLT)

$410 million




$6,489 million



Canadian Natural Resources (NYSE:CNQ)

$3,448 million



Intuitive Surgical

$259 million



Research In Motion

$2,881 million



Range Resources

$298 million



Terra Industries

$260 million



Data courtesy of Capital IQ, a division of Standard and Poor's.

As you can see, even though some of these stocks -- such as Research In Motion and Terra Industries -- got whacked by investor pessimism during the last recession, their long-term returns have more than made up for it.

Also, we expected that many of these companies would be small ones, and sure enough, seven of the 10 were small. But we didn't expect that five of the companies would come from oil and gas operations. In fact, just one company (Intuitive Surgical) came from one of the "defensive" sectors mentioned above! Who would have placed bets on energy back in the spring of 2001?

Conventional wisdom holds that the energy sector would be hurt in a recession. As the economy slows down, demand for energy declines, which eventually shows up on the bottom lines of companies in that sector.

As a result, followers of conventional wisdom would have been unlikely to invest in the top two companies on this list back in March 2001 -- two companies that did fine both during the recession and after.

20/20 foresight
Whether or not we are in a recession right now, our above list of outperformers since the last recession provides us with some helpful guidance for the current market. Here are just a couple of takeaways:

  1. The specter of recession should not prevent you from making long-term investments in great companies that you've researched and valued. Buying Apple was a great decision back in March 2001, even though consumer spending would slow for the next eight months or so. Indeed, Apple was recently ranked No. 1 in The Wall Street Journal's Honor Roll of companies over a long-term time horizon. As legendary value fund manager Bill Miller recently advised us, Fools should ignore the noise of a possible recession and focus on buying the same great companies that we would anyway.
  2. Trying to pick the next hot sector is pretty difficult. A recent table from The Wall Street Journal shows that the "Oil and Gas Production" sector was ranked fourth out of 70 over the past five years. The "General Financial" sector was dead last. Is this pattern likely to continue over the next five years? Who knows? Diversifying across many sectors and trying to find the best companies in each sector are both ways to diminish the importance of such a question.

The down low on downturns
So what's the best way to approach a downturn in the economy? Smart investors may fare best by doing what they always do: Look for great companies at reasonable prices across a variety of sectors.

Our Motley Fool Stock Advisor newsletter service has been taking that approach since April 2002. Despite difficult market conditions at the time of the launch, Stock Advisor is currently beating the market by 23 percentage points since inception.

To read about the stocks we like for new money right now, click here for a 30-day trial. Don't let the fear of a recession derail your long-term investing strategy.

This article was originally published on March 3, 2008. It has been updated.

John Reeves does not own shares in any of the companies mentioned in this article. Ilan Moscovitz owns shares in Apple. Apple and UnitedHealth Group are Motley Fool Stock Advisor recommendations. Intuitive Surgical is a Rule Breakers selection. Wal-Mart, UnitedHealth, and Pfizer are Inside Value picks. Diageo and Pfizer are Income Investor recommendations. The Motley Fool's disclosure policy is one of the Top 10 inventions since sliced bread.