For many investors, picking the precise time to buy a stock is one of the most anguishing aspects of investing. Too often, we're plagued with fear that we're too early, or too late.

Certainly, it is a volatile time for stocks, but investors focused on building long-term wealth know that this recessionary period offers one of the best chances to buy stocks on the cheap. Seasoned value investor Bill Lippman has admitted to seeing great opportunities in the market today, and even President Obama has encouraged people to buy stocks for long-term investment.

OK, I'll buy. But which ones?
If you're like many other investors looking to buy a cheap stock today, you're probably tempted by large caps like Coca-Cola (NYSE: KO), McDonald's (NYSE: MCD), or Johnson & Johnson (NYSE: JNJ), which are trading below highs seen in recent years. But if history is any lesson, you're selling yourself short precisely because this is the same, conservative approach many other investors are taking.

Looking back, many of the market's best performerssince the last recession, like Quality Systems , Goldcorp (NYSE: GG), and priceline.com (Nasdaq: PCLN), were small caps during the last recession and have since grown into multibillion-dollar companies. You may know that small caps outperform others over the long term, but small-cap companies have also beaten large capsin the year following the past 10 recessions.

For instance, Money Magazinepoints out that after the 1973-74 downturn, small caps beat large stocks for 10 years between 1974 and 1983. And after the Great Depression, small stocks led the market for 11 of the next 13 years.  

Yeah, but this time could be different
So how is the "small caps outperform everything" theory holding up in this recession? If we look from what many are now acknowledging as the start of the recession (early December 2007) to the market bottom in March, we see that stocks -- small and large alike -- have seen a severe pounding.

Index

Return From 12/3/07 – 3/9/09  

Russell 2000 US Small Cap Index

(46.2%)

Russell 1000 US Large Cap Index

(44.9%)

Russell 3000 Broad-Market Index

(45.0%)

Source: Russell Index Calculator.

Despite all the predictions flying around, no one knows if stocks have found a bottom or when the recession will end. But since the March low, small caps have once again bolted out of the gate.

Index

Return From 3/9/09 – 9/25/09

Russell 2000 US Small Cap Index

72.1%

Russell 1000 US Large Cap Index

56.1%

Russell 3000 Broad-market Index

57.3%

Source: Russell Index Calculator.

This is only a small window to compare performance, of course, but the data does lend evidence that, once again, small-cap stocks tend to be more significantly underpriced. For this reason, an investor is more likely to uncover a good value on a small-cap stock with strong fundamentals before the mainstream market catches on.

And don't get too caught up in timing the end of the recession. According to State Street Global Advisors, in the three years following the midpoint of each of the last three recessions, small-cap stocks delivered a solid advantage, particularly relative to large caps, returning an annual average of 8% more than large-cap stocks.

Many places to start
Here are some small caps I've been looking at for their strong growth and return on equity, as well as low to nonexistent debt-to-equity ratio:

Company

Return on Equity (TTM) Continued...