There's an old saying that in ugly economic times, lipstick sales go through the roof. It makes sense: A new shade of lipstick is an affordable -- and easy-to-justify -- splurge. So what better time than now to pretty up your portfolio with beauty-industry stocks?

Hold on a second! Back away from the cosmetics counter, investors. Pick the wrong shade of stock, and your portfolio could end up looking like the bottom of our makeup bags -- littered with a bunch of pretty shades of shadows, lip stains and powders that proved unflattering after we got them home.

Pay attention, guys. You're on our turf now.

Ding dong! Anyone home?
Our male counterparts can be forgiven for their misguided cosmetic industry purchases … to a point. We're here to set the record straight about a beauty company that guy investors seem to be gushing over.

When was the last time you thought about the Avon Lady? Exactly. But somehow, Wall Street didn't get that memo.

Avon Products (NYSE: AVP) shares recently enjoyed major trading interest, thanks to rumors that L'Oreal might acquire it. That speculation implies a lot more positivity than we can muster. So far, the rumor has failed to translate into reality, and Avon's business outlook keeps looking worse.

When we started looking at Avon, we really, really wanted to like the company. Like PepsiCo (NYSE: PEP), which we highlighted here on Stock Picks for Chicks, Avon has a female CEO. But girl-power loyalty only goes so far.

Pepsi's got a well-known female CEO and a lot of impressive long-term growth plans. Avon, not so much. The company continues to struggle this year after a weak 2009, and it recently announced plans to cut 400 jobs. Although a major part of Avon's issue is a slowdown in the U.S. market, a good chunk of its troubles surely owe to its loss of brand luster in the U.S. We'd argue that Avon is retro in a bad way.

Many investors seem to boast about the huge chunk (80%) of Avon's revenue that's generated abroad, but we're less excited. Regulatory and currency translation issues are no walk in the park for investors, and growth concerns in China, Brazil, and Russia bode ill for the company. (Since Brazil and Russia together make up 25% of Avon's revenue, so those worries are hardly skin deep.) Plus, there's always the risk that the same lack of trendiness now plaguing Avon at home will eventually settle in abroad as well.

Blemishes on Avon's business model
The company may tout its direct-selling distribution channel (comprised of 6.2 million active representatives, according to the latest 10-K), but we see that as a major red flag. Think about it: Its direct selling distribution channel is effectively its only distribution channel. Having all its eyeliners in one cosmetic bag is the kind of major risk that should send chills down any discriminating investor's spine.

Its direct-selling focus means that Avon competes for women's time and inclination to participate in these types of selling events. After all, rival Mary Kay, Berkshire Hathaway's (NYSE: BRK-B) Pampered Chef, and Tupperware (NYSE: TUP) all rely on the same type of in-home experience to peddle their wares.

And plenty of competitors crowd front of shoppers wherever they go -- cosmetics rivals like Estee Lauder (NYSE: EL), Revlon (NYSE: REV), L'Oreal, and retailers that sell cosmetics (like drugstores and department stores), not to mention pure plays like Sephora and Ulta (Nasdaq: ULTA).

Lipstick, pigs, and ugly portfolios
Avon's had various turnaround plans in the works since late 2005, and it's expected to be done implementing them all by 2012-2013. However, whether you call it a restructuring plan or a makeover, there's a point where there's no way to put lipstick on a pig. Investors would do well to seriously question whether Avon can generate adequate sales growth over the long haul.

We believe the Avon brand's best days are well behind it. Investors who take the chance on this wallflower could end up with ugly blots in their portfolios. This company could use a radical change, but pulling it off sounds like a long shot in a real world full of formidable competition.

That said, we do believe strongly in making a makeup play for our portfolios. Next week in Stock Picks for Chicks, we'll put on our faces and reveal a cosmetic-related stock that's far more attractive for investors' portfolios.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.