Where You'll Find Tomorrow's 20-Baggers

With the U.S. economy in full retreat and looming prospects for the first global economic contraction since World War II, many investors have retreated away from the stock market toward bonds and cash. Even those who haven't given up on stocks entirely are thinking twice before committing their money to anything but the highest-quality companies they can find.

However, the idea that growth stocks no longer have any prospects is patently absurd. Regardless of what direction the overall economy moves in the coming months and years, some companies will take advantage of whatever business opportunities arise -- and they'll emerge as the growth leaders of tomorrow.

Where to look
For some clues on where those growth leaders most often appear, I decided to turn back the clock and take a look at the state of affairs at the end of the last recession back in 2001. I looked at two sets of companies -- those that managed to thrive and grow even during the recession year of 2001, and those that emerged the strongest in 2002 after the recession ended.

Going in, I expected to see two very different groups of companies. In the 2001 group, I thought companies that could capitalize on the tough economic conditions during the recession would do best. But by 2002, it seemed likely that another set of companies would gather the reins and overtake those companies that were best positioned for a slow economy.

That assumption turned out to be incorrect, as many companies grew strongly in both years. Here are just some of them:

Source: Capital IQ, a division of Standard and Poor's.

Now to be clear, I'm not expecting these companies to be the growth drivers of the recovery this time around. But from that list -- along with the other companies that maintained strong growth throughout the period -- you can draw some general conclusions about what to look for during a recession:

• Don't give up on a sector. You might have thought that while the tech bubble was bursting, no technology companies would show up in a growth stock screen. Yet that was far from the case, as some tech-based businesses managed to find exactly the right niches to grow and prosper. Similarly, even though the financial industry has been decimated in the past year, some money center banks have still managed to grow revenues year over year.
  
  
• Look everywhere. Perhaps more surprising was the breadth of companies on the list, spanning nearly every sector of the economy. From housing to food, education to biotech, certain players stood out from the crowd. That means you don't necessarily have to identify the hot sector in order to find good companies.
  
  
• Think small. Although your predilection in tough times may be to retreat to the largest, most stable companies, that won't get you to the growth prospects you're looking for. Some of the companies listed above qualified as large-cap stocks even back in 2001 and 2002, but they certainly weren't among the biggest companies, leaving them plenty of room to grow.

So don't conclude that just because the economy is stalling or shrinking, all your stocks will have to follow suit. Even during the toughest of times, a hard look will uncover companies that prove to be the growth exceptions to the general rule of a contracting economy.

Finding the right stocks will not only help you preserve value during a recession, but also get a head start on the next growth phase, when it comes.

For more on finding tomorrow's growth stories today, read about:

• 20 years from now, what will you regret not having bought?
• The stock that got away.
• What every shareholder should know now.