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.
Opening a restaurant is typically a death sentence. While the old myth about 90% of independent eateries failing in their first year has been debunked, recent studies show that more than half of new eateries don't make it through their third year of business.
It's under that backdrop that OpenTable went public two years ago. The leading platform for indie restaurants to drum up online reservations has been tempting bear bait in the past.
Poor skeptics. Shares of OpenTable have popped nearly fivefold in its short public life, trouncing analyst profit targets every single quarter.
Photofinishing is for dinosaurs, right?
We live in a digital age, and that means that we share our photographs through social networks, blogs, and emails.
The pain in the industry is real. Snapshot pioneer Kodak
The few remaining sites include Kodak Gallery and Hewlett-Packard's
Shutterfly isn't running its site to beef up its brand elsewhere. This is all that Shutterfly's got. It's working! Revenue and earnings spiked 27% and 35%, respectively during Shutterfly's holiday quarter. Its fresh guidance for the year ahead is well above what the pros were expecting.
Sirius XM Radio
Bankruptcies and privatization efforts have depleted the radio industry's appeal. Advertising is drying up. Portable connectivity and preloaded iPods are giving commuters better ear candy.
Radio isn't sexy, but there's one special company in this unloved niche whose shares have popped 35-fold since bottoming out two years ago.
Sirius XM has staged a dramatic turnaround. The only game in town when it comes to premium radio is now reliably profitable. There are 20 million subscribers -- and counting.
Radio isn't dead. It just evolved.
It's hard to promote job listings these days. Monster Worldwide
This niche should improve soon domestically, but why wait when you can find heady growth right now in China.
51jobs runs an online recruiting website and a popular weekly roundup of job listings. It's a truly scalable model. Revenue climbed 24% in its latest reported quarter, but earnings surged 75% higher.
Sometimes an industry that is ho-hum stateside is booming abroad.
Roll up those sleeves and dive in with me
I'm not the only one looking for pretty stocks in ugly places.
The analyst team at Motley Fool Special Ops has spent the past year singling out special situations in a real-money $250,000 portfolio.
The newsletter service goes where other financial publications won't. It doesn't shy away from micro-cap stocks, turnaround situations, and companies that just came out of bankruptcy. It sifts through the ugly to find the pretty, and you'd be nuts not to sift alongside Tom Jacobs' proven analyst team.
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, you'll know where to find me.
This article was originally published March 20, 2010. It has been updated.
51job and OpenTable are Motley Fool Rule Breakers recommendations. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.