The Top 10 Stocks Since the Last Recession

Now that it looks like we're headed into 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 performing domestic stocks since the beginning of our last recession, which occurred from March 2001 to November 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.

Overall, we were a bit surprised by the results.

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

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 three of the companies would come from oil and gas operations, and another one from mining. Who would have placed bets on those sectors back in the spring of 2001?

Conventional wisdom holds that the energy sector would be hurt in a recession. As the economy slows down, the 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 foresightWe may or may not be in a recession right now, but our above list of outperformers since the last recession provides us with some helpful guidance for the current market. Here are just a couple takeaways:

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 just ranked No. 1 in The Wall Street Journal's Honor Roll of companies over a long-term time horizon. As Legg Mason's 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.

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 downturnsSo what's the best way to approach a downturn in the economy? For smart investors, it may well be to do what they always do. Look for great companies at reasonable prices across a variety of sectors.