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Conventional wisdom would have investors flee small-cap stocks when the economy takes a tumble. Big companies are safer bets, the thinking goes.

Maybe not right now. With meltdowns at AIG, Lehman Brothers and Wachovia, the S&P 500 dropped 28 per cent over the past 12 months while gross domestic product growth slowed to a crawl. The Russell 2000, made up of smaller fish, is down 18 per cent over the same period.

With that in mind, we identified the strongest small public outfits in a very tough time for our list of the 200 Best Small Companies in America. To qualify, companies must have sales between $5 million US and $750 million and a stock price of $5 as of Sept. 29. The ranking is based on return on equity, sales growth and profit growth over the past 12 months and also over five years. We also compare a company's stock performance with that of its industry peers. The shares of the companies on our 2007 list fell 15 per cent on average over the past year, slightly outperforming the Russell 2000.



We axed companies with fishy accounting or serious legal entanglements. One of those is ArthroCare, a company in Austin, Texas, that makes minimally invasive surgical products. The company announced it was restating results from 2006, 2007 and the first quarter of this year. There's a shareholder lawsuit over that and the timing of $12 million in stock sales by ArthroCare insiders.

Eighty-three of last year's members didn't make the cut this year. Nineteen of those companies grew too large, among them Hansen Natural, the maker of Monster Energy drinks (sales in the last 12 months: $988 million). Hansen was our top-ranked company in 2007.

Eight more of last year's companies fell off the list after being acquired, including software maker Ansoft and work-site child-care provider Bright Horizons Family Solutions.

The spike in energy prices has added more than a few oil and gas companies to the list, including this year's top company, GeoResources. Headquartered in Houston, Texas, it merged last year with Southern Oil & Gas and bought a subsidiary of Chandler Energy that boosted oil reserves sixfold and natural gas reserves sevenfold. Analysts expect sales to hit $100 million in 2008, up from $40 million last year.

We welcomed a total of 37 companies this year that have never appeared on previous lists of our best small companies.

Among the newcomers is Omega Protein, ranked No. 154. The company has been around for more than 100 years, mostly selling fish meal that finds it way into animal feed. More recently the company has caught fire thanks to the supposedly magical health benefits of Omega-3 fish oil — of which Omega Protein is the country's largest producer. Sales were up 27 per cent in the second quarter and are expected to hit $190 million this year. (See more newcomers.)

Our list includes many traditional small technology companies, like Pros Holdings, ranked No. 30, which develops pricing analytics software. Yet there are also many other companies utilizing technology affecting our everyday lives. Take Green Mountain Coffee Roasters. Its Keurig Single-Cup Brewer has revolutionized coffee making for those not interested in making a whole pot. The single-cup market rose 59 per cent last year to $176 million, according to research firm NPD. Single-cup penetration is still only 5 per cent of U.S. households, leaving lots of room for growth. (For more, see Everyday Tech Stars.)