TGIF--thank god it's friday--again!" so wrote CLSA, the large Hong Kong broker, in a recent client e-mail following yet another nasty week in the market. It has been a long while since investors have felt so gloomy and stock index declines have been so steep. Investment firms Goldman Sachs, Merrill Lynch, Morgan Stanley and Lehman Brothers have announced layoffs.
With all the bad news, giving up on the market is easy. Don't be fooled. This is the best time in years to be scooping up small growth stocks.
The last time we encountered such problems was in 2001--02, with the dot-com bust. The investment industry shrank, confidence sagged and layoffs hit. As things turned out, the latter half of 2002 was great for buying stocks. Ditto 1998, when the Asian flu roiled global equity markets; financial firms panicked then, too, and slashed head count. Shortly after, the market took off. Lesson: Big market declines and legions of jobless Wall Streeters bring cheap stocks and good buying opportunities.
While buying bloodied shares is tempting, I recommend the opposite. Go for stocks that have held up well during the downturn. The economy will take time to recover, and hardy companies that can grow despite economic headwinds should continue to be well appreciated on Wall Street. Here are four.
After losing money for most of the past two years, software maker Phoenix Technologies (nasdaq: PTEC - news - people ) (16, PTEC) has new management that has restored the company. Phoenix boosted revenue by 79% in the most recent quarter and posted a solid profit.
In the early 1980s Phoenix pioneered the design of the basic input-output system (BIOs) that boots up a computer. Phoenix is the leader in the modern version of BIOs with a 50% market share. The company debuted two exciting products late last year: FailSafe, a theft-loss-protection service that remotely disables lost or stolen notebook PCs, and HyperSpace, which eliminates the long wait when Windows is loading in laptops. Phoenix trades for 25 times my 2008 earnings estimate.
Ctrip.com (55, CTRIP ) is the dominant online travel provider in China. I've followed and invested in this company for years and continue to be amazed at its prowess. Chinese have more disposable income these days, so they're traveling more. The Beijing Olympics will spur bookings. In China only 3% of travel industry revenue is generated online, leaving a wide-open space for growth. Analysts expect online's share to quadruple by 2012.
Ctrip has fostered strong brand loyalty, with 80% of sales from repeat customers. It carries a lofty valuation of 45 times my estimate of 2008 earnings, but its growth is so impressive that the high multiple is eminently worthwhile.
Sapient (7, SAPE ) reported fourth-quarter results way better than analyst expectations, with revenue up 35%. The company provides marketing and technology consulting services, and thus has benefited handsomely from the continued shift to advertising dollars online and away from traditional outlets. The company is headquartered in Cambridge, Mass. and has extensive operations in Europe, but 60% of its employees are in India, providing around-the-clock project management. Their comparatively low salaries translate into reduced fees for clients.
Valuation of the stock is still very reasonable, reflecting concerns that advertising budgets will shrivel, even in the robust online world. This phenomenon has indeed begun to affect almighty Google (nasdaq: GOOG - news - people ). Still, online is where the future lies, and Sapient is well placed for the eventual upturn. Excluding acquisition charges, this fine company trades for only 13 times my 2008 earnings estimate.
Energy producer Carrizo Oil & Gas (nasdaq: CRZO - news - people ) (60, CRZO ) is thriving from higher demand and prices for natural gas. In the latest quarter revenues generated by the Houston company rose 65% to $40 million. One advantage is its extensive presence in the Barnett Shale region, which covers a significant swatch of the Dallas-Fort Worth metroplex. The Barnett Shale is a U.S. onshore gas field currently swirling with activity, in part because modern drilling techniques have recently increased the ability to tap such fields. Production there will continue expanding. Another plus is Carrizo's stake in the Huntington Field in the North Sea, discovered last year; it stands to yield lots and lots of oil. Carrizo trades for 34 times my 2008 earnings estimate.
Soldiering through an economic slump takes considerable intestinal fortitude, not to mention patience. Small growth stocks tend to spring up rapidly once the bad days are over. Invest now. These will be much more expensive in a year or two
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