Generalizations will kill your portfolio.
It's too easy to dismiss an entire sector, especially one that's out of favor. If an industry's fundamentals are weak, most investors will simply walk away from a basket of related stocks.
I see things differently. The darker the business, the broader the disparity between its participants. The bleaker the prospects, the better the chance that there's a budding disruptor, ready to reinvent its moribund niche.
I don't run from ugly industries. I run to them, sifting through the unwanted to find my next garage-sale Picasso.
Let's go over a few stocks that I think fit the bill in the landfill.
MercadoLibre (Nasdaq: MELI )
We live in an era of Craigslist and other hubs of free classifieds. Why pay to list an item in an auction, only to be slapped with yet another fee if it sells? This is the quandary that has put eBay's (Nasdaq: EBAY ) marketplace business on concrete blocks in recent years. Given its flattish results, eBay's PayPal has been the real driver.
Auctions aren't dead, though. Investors just need fresher passports. Sites like Latin America's MercadoLibre and South Korea's Gmarket -- the latter recently acquired by eBay -- are growing just fine, given their geographic focus.
MercadoLibre is rolling with its strength in Argentina and Brazil. Earnings soared 83% last year on a 26% increase in revenue. It expanded into Portugal last month, taking advantage of its Portuguese proficiency to hit up Europe.
Chipotle Mexican Grill (NYSE: CMG )
Unless you're an eatery with a dollar menu, you've probably suffered through the recession. Eating out becomes more of a luxury than a novelty when money's tight, and many of the country's quick-service and casual-dining chains have felt the pinch of consumers who are only just now beginning to eat out again.
Well, Chipotle didn't experience a lull. Comps have continued to grow at the popular burrito roller during the market downturn.
It's true that the "food with integrity" chain is bracing investors for a flat 2010, but we've been here before. Chipotle routinely underestimates its prospects. It didn't just beat analyst estimates last year. Chipotle pummeled them, topping Wall Street guesstimates by at least 22% in every single quarter of 2009.
rue21 (Nasdaq: RUE )
Most of the mall retailers may have sprung to life last month, but it has been a brutal recession for most of the apparel chains.
Remember the restaurant thesis? It's not all that different here. Instead of eating at home, penny-pinchers will just wear what they already own or head out to markdown specialists such as Ross Stores (Nasdaq: ROST ) and TJ Maxx parent TJX (NYSE: TJX ) that have thrived in this climate.
It's no surprise to learn that Ross and TJX scored a 6% spike in comps last year. Offering entry-level designer labels and hosed-down prices is an easy selling point. The same can't be said for rue21, aiming for fashion-conscious teen girls and boys at competitive -- but not cutthroat -- prices.
Comps rose 8% at rue21 last year, and that's stacked on top of a 4% gain in fiscal 2008. Even through the darkest stretches of mall avoidance, rue21 has always found a way to keep the registers busy.
priceline.com (Nasdaq: PCLN )
You don't have to be within the airspace of volcanic ash to know that the travel sector has been a wreck during the soft economy. Corporate travel is down, as companies try to scale back spending. Consumers taking chunky vacations for the sake of escapism? Bah!
The "name your own price" portal has bucked the trend. It has beaten analyst estimates in each of the past 15 quarters, and its latest report was another beauty. Revenue climbed 33%, fueled by a 53% increase in gross travel bookings. Adjusted profits checked in 54% higher than the previous year's fourth quarter.
Your uncle the travel agent or your niece the hotel manager may be smarting, but priceline.com is connecting with those who are still traveling.
Roll up those sleeves and dive in with me
As a member of the analyst team for the Motley Fool Rule Breakers newsletter service, seeking out disruptors in unlikely places comes naturally. MercadoLibre and Chipotle are core recommendations, in fact.
It's the best way I know to buy into the stocks that will breathe new life into any portfolio.
You don't need to join me and my fellow analysts to unearth monthly treasures. Hopefully I've done a good enough job of teaching you how to spot neglected sectors, and singling out the desert roses within them. If not, you'll know where to find me.
This article was originally published on March 20, 2010. It has been updated.
Longtime Fool contributor Rick Munarriz leaves no stone unturned. He does not own shares in any of the stocks in this story. Chipotle is a Motley Fool Hidden Gems pick. Chipotle and MercadoLibre are Rule Breakers picks. eBay and priceline.com are Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Chipotle. The Fool has a disclosure policy.