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.
Wireless carriers aren't sexy. In a world where iPhones, BlackBerrys, and Android smartphones are attracting all of the buzz, the mobile service providers subsidizing the flashy handsets in exchange for two-year contracts aren't cashing in.
The country's three leading wireless giants are expected to post flat to declining profitability in fiscal 2010. Sprint Nextel
If you want to achieve success in this doomed niche, bring a passport. China Mobile is the market share champ in the world's most populous nation. If China Mobile commands roughly two-thirds of the country's wireless accounts, where's the upside? Really? You have to ask? This is a market share pie that will grow significantly as China's economy -- growing at a robust clip of roughly 10% over the past few years -- continues to create an emerging middle class.
Sirius XM Radio
Bankruptcies and privatization efforts have depleted the radio industry's appeal. Advertising is drying up. Portable connectivity and pre-loaded iPods are giving commuters better ear candy.
Who wants to deal with large commercial blocks or repetitive play lists, or guarded "morning zoo" hosts that are about as interesting -- and uncaged -- as the pet turtle you had growing up.
Now we have Sirius XM. The only game in town when it comes to premium radio is now profitable. It is closing in on a whopping 20 million subscribers, tacking on nearly 1.5 million net new accounts during the past five quarters. Sirius XM has thrived in the automotive space, despite the influx of dashboard distractions. Never underestimate the appetite for quality and dependable audio entertainment.
Diehard gamers have been taking it on the chin lately. Video game sales have been slipping since early last year. Folks just aren't buying as many games as they used to, either spending their time on cheaper online diversions or simply milking older titles a little longer through web-fueled multiplayer entertainment. Niche retailer GameStop
Take-Two has been a rare bright spot, after languishing itself. The renegade publisher reported a surprising profit in its latest quarter. As rivals post ho-hum results, Take-Two is coming through with sleeper hits lately, including Red Dead Redemption and Mafia II.
Two years ago, Electronic Arts
Retail is a fickle sector, and shoppers get even finickier when it comes to full-priced apparel.
The next time you're certain that the mall is dead, see if the landlords are lucky enough to have lululemon as a tenant. The seller of upscale yoga and workout clothing is rocking in this soft economy. Revenue in its latest quarter soared 56%, propelled by brisk expansion and a stunning 31% spike in comps. Net income is growing even faster.
This isn't some fluke. Same-store sales were strong heading into the recession, and comps have clocked in at 25% or better during each of the past three quarters. Yes, there's a great investing idea even in pricey yoga pants.
Roll up those sleeves and dive in with me
As a member of the Rule Breakers analyst team -- one of the many services that the Million Dollar Portfolio newsletter scours to drum up the best ideas in Fooldom -- seeking out disruptors in unlikely places comes naturally.
Million Dollar Portfolio takes stock-picking to the next level, running a real-money portfolio that is managed before its members -- and offering up recommendations that are being vetted twice.
I mentioned China Mobile earlier. Million Dollar Portfolio singled it out earlier this year, and at a lower price point than where it is today. If you want to seek out pretty stocks in ugly places in a vibrant community managed by some of the savviest stock pickers that I know, click here to learn more.
This article was originally published on March 20, 2010. It has been updated.
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.
Longtime Fool contributor Rick Munarriz leaves no stone unturned. He does not own shares in any of the stocks in this story. Sprint Nextel is a Motley Fool Inside Value pick. Take-Two Interactive Software is a Motley Fool Rule Breakers selection. Electronic Arts is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended writing covered calls on GameStop. The Fool owns shares of China Mobile and Take-Two Interactive Software. The Fool has a disclosure policy.