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.
Hardwood flooring doesn't appear to be a sexy sector these days. Selling finished planks of wood emits the smoky aroma of scorched homebuilders, home improvement superstores, and maybe even commercial real estate, since Lumber Liquidators also moves laminate strips.
Its latest quarter was a beauty, though. Net sales rose 18% on the back of an attractive 5.5% increase in comps. Quarterly profits grew even faster, going from $0.17 a share to $0.25 a share on an adjusted basis. For those scoring at home, Home Depot
With 186 namesake locations, including 36 new stores opened throughout the past year, there is still plenty of real estate to cover in the company's highly fragmented sector. Here, Lumber Liquidators is the undisputed top dog.
Mom-and-pop eateries are a dying breed. Who has the disposable income these days to hit spiffy haute cuisine restaurants? If casual-dining chains are struggling to move their marked-down meals, imagine how tough life is for indie chophouses and stylish bistros.
This may seem like a recipe for trepidation, but OpenTable is serving it well-done. The company provides participating restaurants with a high-tech electronic reservation book that makes it easy to blend call-in requests with online reservations through OpenTable.com.
The system works, and the proof lies in last quarter's pudding. OpenTable's installed base of restaurants has climbed 20% over the past year, yet reservation revenue soared 47%. In other words, eateries are hopping aboard, and the network effect is making the company more successful by serving up more reservations per restaurant.
Sirius XM Radio
"Radio is dead," they say. The largest radio group was taken private in 2008. The third-largest group filed for bankruptcy in December. If terrestrial radio can't give itself away, how can a premium audio content provider command $15 a month?
Well, Sirius XM is making it work. Teaming up with automakers -- and rewarding them for promoting factory-installed satellite receivers -- has helped the media giant broadcast to nearly 19 million subscribers.
Free cash flows continue to improve, and credit rating agencies are feeling rosier about Sirius XM's prospects.
Digital video has been a dud. The DVD is fading. Just don't tell Netflix. The popular service has quickly grown to nearly 12.3 million subscribers. Revenue increased 24% in its latest quarter, with its bottom line expanding even faster.
Netflix's success comes as movie studios are bellyaching over DVD sales. Cable television subscribers are fleeing market leader Comcast
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. OpenTable and Lumber Liquidators are recent 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 single out the desert roses within them. If not, you'll know where to find me.
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Longtime Fool contributor Rick Munarriz leaves no stone unturned. He does own shares in Netflix, a Stock Advisor recommendation. Lowe's and Home Depot are Inside Value pick. Lumber Liquidators Holdings and OpenTable are Motley Fool Rule Breakers recommendations. The Fool has a disclosure policy.