What a difference 12 months can make. Last year at this time, we were staring at a market abyss. Right now, on the other hand, we've seen the market rise half of the way back to its all-time high, with small caps taking the lead.

Small caps generally lead the broader equity market into or out of downturns. For example, the Russell 2000 peaked in July of 2007, while the large-cap indices, such as the Dow and S&P 500, didn’t peak until October 2007. Third-quarter GDP is expected to be released on Thursday, and the consensus is that the economy grew 3% in that period, snapping four consecutive quarters of negative growth.

As we begin to emerge from this wretched recession, it's time for investors to gain small-cap exposurein their portfolios if they haven't done so already. The Russell 2000, the small-cap stock benchmark, has already run up a whopping 66% since its March 9 low; however, the index still remains 31% below its peak in July 2007.

"Historical research has tested that, on average, small-cap stocks led large caps at 12, nine, six and even three months prior to and after a recession's bottom, as well as at the exact moment of the trough itself," according to Stephen Wood, senior portfolio strategist at Russell Investments. "Investors who loaded up on small caps relative to large caps three and six months prior to the bottom, and those who timed the bottom perfectly, had on average the best returns."

Building up small-cap exposure
For the long-term investor, trying to time that inflection point in the market clearly isn't necessary. In fact, small caps have a tendency to outpace their larger brethren as the economic operating environment improves. Case in point: Since the March 9 low, the Russell is up 66%, while the Dow is up 51%. So let's start searching!

To uncover winning small-cap companies, I ran a stock screen using the Motley Fool's CAPS screening tool. I looked for companies with:

Here's what I uncovered (and you can see the screen here-- remember that results will be updated as the market changes):

Company

Market Cap (in millions)

Price-to-Earnings (TTM)

LT Debt-to-Equity Ratio

Current Ratio

EPS Growth Rate (last 3 years)

Rev. Growth Rate (last 3 years)

Return on Equity (TTM)

Almost Family (Nasdaq: AFAM)

$270.7

13

0.28

2

27.29

40.63

20

China Education Alliance (NYSE: CEU)

$122.3

10.8

0

16.2

53.39

58.01

34.2

Diana Shipping (NYSE: DSX)

$1,044.9

4.7

0.31

3.4

29.47

49.96

28.6

LSB Industries (NYSE: LXU)

$275.4

10.6 Continued...