Stocks To Beat The Recession

With the R-word on the lips if not the inner consciousness of every pundit, trader, economist and hedge fund manager with a pulse, we thought it would be quite timely to focus on three small caps that we believe can provide a ray of sunlight in these dreary days. Here are my top three--each expected to grow earnings 30% or more, beat last quarter's estimate and have had earnings per share estimates revised higher for this year. As an extra bonus, each is 20% or more off recent highs and has 30% or greater upside potential in the next 12 months.

Gaiam Inc. (nasdaq: GAIA - news - people )

Recent price: $24

12-month target: $31

Gaiam is a branded lifestyle media company focusing on fitness, wellness, spiritually meaningful entertainment, and sustainable living. The company has coined the acronym LOHAS (Lifestyles of Health and Sustainability) to describe its target audience. The company creates the majority of its media content in-house and distributes its products and services through multiple retail and online channels in the U.S. as well as internationally. The company's acronym LOHAS describes its target market, which the company estimates at $200 billion per annum globally.

It has also announced it will sell a minority stake in Real Goods Solar to the public in an initial public offering. Good for Real Goods, but also good for Gaiam shareholders. The company plans to sell a minority position consisting of 10 million shares of Class A common stock to the public and use $19 million of the proceeds to repay funds invested in Real Goods by GAIAM. Earnings growth is just ramping up and could exceed .60 for 2008.

Price Smart (nasdaq: PSMT - news - people )

Recent price: $25

12-month target: $37

Operates 23 membership-based warehouse club stores in Central America (outside of Mexico) and the Caribbean. Similar to U.S.-based warehouse stores, though smaller, PriceSmart stores primarily sell food, beverage, health and beauty, soft goods and house wares to small businesses and affluent consumers. Double-digit, same-store sales growth and the potential for new stores in existing markets suggest the company could sustain a 15% top line and 20% earnings growth rate longer term.

PriceSmart was founded by the Price family, who also founded Price Club, and later sold it to Costco (nasdaq: COST - news - people ) in 1993. Robert Price remains chairman and CEO of PriceSmart, and his depth of experience is a key investment positive.

The company has a strong balance sheet with no debt, expanding margins and a projected three-year earnings growth rate of 20%. PriceSmart began paying a 32 cents annual dividend in fiscal year 07, signaling management's confidence in strong cash flow. Insiders, including CEO Price, and his father, Sol, own 53% of the company. PriceSmart could earn $1.20 per share in the next 12 months.

International Assets Holding Corp. (nasdaq: IAAC - news - people )

Recent price: $24

12-month target: $37

International Assets Holding Corp. is a specialized financial services firm focused on providing trading and market-making services in five primary business segments: international equities market making, international debt capital markets, foreign exchange trading, commodities trading and asset management. The company seeks to take advantage of its expertise in niche markets not adequately covered by major global brokerage firms.

We continue to be impressed by IAAC's strong revenue and earnings growth, along with its ability to integrate recent acquisitions, whereby the company is gaining critical mass in many of its business segments. If investors only look at revenues and earnings, they would totally miss the positive growth story unfolding at IAAC. Accounting rules continue to misrepresent the company's true growth picture. On a mark-to-market basis, the company posted solid triple-digit revenue and earnings growth in last year's fourth quarter, which beat our estimates by 28% on the top line and 97% on the bottom line. Mark-to-market earnings could exceed $1.60 per share in 2008.