Companies have cut costs to the bone in this brutal recession.

Lost jobs, shuttered facilities and difficult mergers are commonplace throughout corporate America.

The question for investors is whether all that slashing actually improved efficiency at the firms whose stock they own or instead rendered them too emaciated to participate in an economic recovery.

Construction equipment giant Caterpillar Inc., based in Peoria, Ill., improved its image with Wall Street through extensive cost-cutting, even though third-quarter profit fell 53 percent and revenue declined 44 percent. Those results beat analyst estimates, the stock is rising, and management says it sees signs of economic recovery.

The world's largest drug maker, Pfizer Inc., which has a campus in Chesterfield, rode relentless cost reductions to a 26 percent third-quarter profit over a year ago even though sales were down 3 percent. With its purchase of rival Wyeth, it envisions more plant closures and job cuts ahead, which boosted its prospects with Wall Street.

On the other hand, the crash diet that Chrysler Corp. and General Motors Corp. underwent was destructive because it eliminated large numbers of engineering and product development staffers vital to the future. Ford Motor Co. used more logic in its reductions and should benefit.

"There is an inflection point at which you start cutting into the muscle of the business," said Arthur Hogan, director of global equity products for Jefferies & Co. in Boston. "You want to align with companies that can not only handle a decrease in demand but are flexible enough to scale into having more business as the end demand improves."

Demand for products is increasing, and companies are running out of places to cut costs, Hogan acknowledged. Companies benefitting most from all this are those beating expectations in both revenue and earnings.

"Too many companies slash costs as soon as they see trouble, and those broad-brush headcount reductions signal that you'd better be careful to take a good look at that company," warned James Hardesty, president and chief economist of Hardesty Capital Management in Baltimore. "If it is panicked because the economy is in trouble, the CFO didn't do his job by putting enough wheat in the barn for a rainy day."

Overall, manufacturers have tended to do a better job than service companies of tightening their businesses to the benefit of their shareholders, said Hardesty.

"Expectations were low for this year, but investors will now be more demanding," predicted Kelley Wright, managing editor of the Investment Quality Trends newsletter in Carlsbad, Calif. "When your expectations are zero and you report a penny in earnings, you've beaten expectations by 100 percent!"

Companies will have to show organic growth or investors are going to reject them in a hurry, he said.

Hardesty and Wright both hold Caterpillar and Pfizer in high regard as corporate ax-wielders that benefitted their shareholders and positioned their firms for a stronger worldwide economy. Hardesty called recent Caterpillar earnings "staggeringly good," while Wright said Pfizer results indicated that management "has done a really nice job."

Semiconductor companies such as Texas Instruments Inc., Micron Technology Inc. and Intel Corp. have outsourced much of the fabrication of their products and can shut down those facilities without worrying about the time and money it will take to start them up again, said Hogan. Industries making autos, engines, container ships and tankers are involved in massive projects that take years to complete and can't be turned on and off, he said.

"Some specialty apparel retailers have decreased their square footage, closed their least productive stores, invested in their most productive stores and are taking advantage of 'just-in-time' inventory," said Hogan. "Inventory controls are paramount because they prevent a retailer from continually having to cut prices to move merchandise."

Hogan's favorite stocks in the specialty retailer category are the youth-oriented Gap Inc., Abercrombie & Fitch Co. and American Eagle Outfitters.

"The CFOs at most companies have very little patience to tough it out through an economic cycle, so when they see cash flows have fallen, they get out the knives and start cutting," said Hardesty. "Unlike Intel, which keeps spending in bad cycles so that it is better-positioned for when it comes out of that cycle, many companies will find they aren't in position to make the sale because they just don't have the inventory."

Hardesty's favorite companies among those whose cost cuts are likely to pay off are Procter & Gamble Co., General Electric Co. and Bristol Myers Squibb.

Government intervention has done some good, Wright said, but it has produced no miracles.

"Cash for Clunkers was — let's be honest — a rescue plan for the auto industry to blow out its inventory," said Wright. "In banking, it looked as though there'd be positive earnings for any bank that was able to hit each customer with an overdraft fee — and Bank of America still managed to lose money!"

But there will be winners emerging from recession in numerous industries, he said, with two noteworthy examples being Abbott Laboratories in health care and United Technologies in technology. They've definitely done their shareholders some good, Wright said.

The true results of cutting all those costs must, of course, show up in future quarterly earnings to make a difference.