You don't need government statistics to see that the economy has slowed down. You can see the signs everywhere.

Falling prices, massive job cuts, and plummeting share prices are just a few of the signs of what most now believe will turn into an official recession by the end of this quarter. Across the economy's major industries, even the biggest, best-known companies are in trouble. Stalwarts like General Motors and Citigroup (NYSE:C) have seen their shares hit hard, and their future prospects increasingly appear grim.

Yet while you'll find plenty of household names on the stock market critical list, hopeful investors are still looking for the growth that will eventually pull the economy out of recession in a completely different part of the stock market.

When Goliath falls
When the fundamentals of the economy are suffering, it's hard for most big businesses to adapt quickly. With huge numbers of employees, locked-in contractual obligations with suppliers and distributors, and billions of dollars already invested in long-term capital projects, the large-cap companies that so many investors cling to during times of distress simply can't turn on a dime and respond to changing market conditions.

As a result, for large-cap companies, surviving recessions -- and the bear markets that often accompany them -- turns on happening to be in the right place at the right time. While sectors like homebuilders and financial stocks got pummeled, companies in defensive industries that were already centered on consumers trying to economize, such as Wal-Mart (NYSE:WMT), suddenly found themselves in the market's sweet spot -- and their shares have been rewarded appropriately.

But for the most part, even the big companies that have avoided the full brunt of the bear market haven't created huge growth. To find the innovation that helps facilitate growth even in a sluggish economy, you have to look to companies that aren't bogged down in bureaucracy and corporate infrastructure.

Think small
The answer to America's economic troubles lies in the success of small companies. Consider the advantages that small-cap stocks have going for them:

  • Because they're small, they can carve out small niches in their industries and develop huge competitive advantages there.
  • Because they're younger, they're more familiar with financing methods that don't rely on the public capital markets, such as venture capital and other start-up financing sources. As a result, they're often leaner and more accustomed to dealing with the tight budgets that larger companies are struggling with now.
  • Because Wall Street doesn't pay as much attention to them, there's less pressure on them to produce short-term-oriented financial results. Therefore, they can look more toward building long-term success.

But the advantages of being small go beyond the theoretical. Just take a look at some companies with strong historical growth rates, prospects for future growth, and stock price performance over the past year:


Market Cap (in millions)

Annualized Net Income Growth, Past 5 Years

Projected* 5-Year Growth Rate Estimate

1-Year Return

Almost Family (NASDAQ:AFAM)





Integral Systems (ISYS)





Axsys Technologies (NASDAQ:AXYS)





PetMed Express (NASDAQ:PETS)





Comstock Resources (NYSE:CRK)





Quality Systems (NASDAQ:QSII)





Source: Capital IQ, a division of Standard and Poor's.
*Projected 5-year growth from Yahoo! Finance.

The vast majority of companies that meet these criteria are small-cap stocks. You may never have heard of many of them, but because of their small size, they have the potential for huge growth -- and stock appreciation in the coming years.

In a bad stock market, it's tempting to give up looking for good stocks. But if you look beyond the best-known names, you'll find companies with promising growth prospects that are worth researching further.

For more on finding good small-cap stocks, read about:

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Fool contributor Dan Caplinger always looks for growth. He doesn't own shares of the companies mentioned. Wal-Mart is a Motley Fool Inside Value selection. Quality Systems and Axsys Technologies are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy grows with you.