Stocks That Grow in Any Climate

Companies that achieve profit growth during a recession are hard to come by. That's why those that do while everyone else is just scraping by look especially attractive right now.

Growth stocks -- that is, stocks known for their earnings power rather than for bargain prices -- have performed well this year. Through August 7, the Russell 3000 Growth index trounced its Value index counterpart, 21% to 9%. Granted, that performance gap came mainly in the first quarter; the second quarter was virtually a tie. But over the long term, owning a great growth stock can be very rewarding. Google, for example, has provided shareholders with a 36% annualized return since its initial stock offering in 2004.

What makes a growth stock great is a company's ability to increase profits consistently over the long haul regardless of economic conditions. Usually a company is successful because it has a head start on its competitors, a strategy or technology that's hard to duplicate, or some other built-in advantage that keeps customers coming back.

All seven stocks profiled below have an edge over their rivals as well as a solid record of consistent profit growth that should persist. None comes cheap, at least by value-stock standards. But over time, we think these stocks will fulfill the expectations built into their prices.

School star

At first glance, Strayer Education (symbol STRA) may seem to be a defensive play rather than a growth stock. After all, laid-off workers tend to flock to school during a recession. But chief executive Robert Silberman insists that Strayer's profits are unrelated to the economic cycle, and the numbers bear him out: Its profit growth, an annualized 19% over the past nine years, is closely tied to the opening of new campuses.

This year the Arlington, Va., firm will open 11 campuses (plus a second operations center to serve online students). Since Silberman took over in 2001, Strayer has expanded from 12 campuses in three states to 67 sites in 15 states, primarily in the Southeast, plus the District of Columbia. There's plenty of room for more growth in Silberman's plan to put a campus in every metropolitan area with a population of 300,000 or more.

Strayer has no debt, and it has generated enough cash to buy back 12% of its shares over the past eight years as well as pay a dividend, currently $2 per share. It also has the pricing power to raise tuition by 5% annually. Those factors, plus enrollment growth at new and existing campuses, should provide steady, low-risk growth for years to come.

Still, the shares fell from $240 last year to $150 in March on fears that Strayer's corporate partners, which provide 20% of revenues in exchange for specially tailored training and educational programs, would cut back. So far, they haven't.

Another concern, that the private student-loan market would dry up, also proved to be unfounded. Strayer's tuition -- $14,000 a year for a full-time bachelor's-degree program -- is low enough to qualify for federally subsidized loans, which remain plentiful. The shares have since rebounded to $216, or about 29 times this year's expected earnings. That's not cheap, but as the U.S. shifts away from a manufacturing-based economy, investing in a more knowledgeable workforce looks like a smart thing to do.

Think of FLIR Systems (FLIR) as one of the earliest "green" stocks. The maker of infrared detection systems was founded in 1978 to sniff out energy waste in buildings. The technology quickly expanded into other areas -- particularly the military, where, eventually, "everything that moves is going to have an infrared camera," says CEO Earl Lewis.

Government agencies in the U.S. and elsewhere use FLIR's infrared cameras and laser devices for early-warning systems, weapons-targeting systems, surveillance and reconnaissance. The Wilsonville, Ore., firm's government-systems division accounts for 53% of revenues and the lion's share of the $598-million backlog of products expected to be delivered over the next 12 months.