There are really only two types of companies out there: the disrupters and the disrupted.
What's in your portfolio?
It's not an easy question to answer. Everyone likes to think that their stocks are the lions feasting on the gazelles. They can't even begin to fathom that the speedy gazelles may be the ones turning the tables and gnawing on the overly confident lions. It can be a costly mistake, because knowing the difference separates the market beaters from the blindsided and vanquished.
Thankfully, there's an easy exercise that will help you determine if you're holding the prey or the hunter. I call it the three-year test.
How relevant will the companies in which you invest be in three years? If you can drum up an unbiased response, you will be able to sidestep losers today and load up on winners.
Take three steps back before going three years forward
The hardest step in this exercise is actually approaching your own stocks objectively. Investors are primarily optimists, so the art of detachment, and pondering the worst-case scenario, is not entirely natural.
Do it, though. You want to make money -- perhaps a whole lot of money -- in this market, don't you?
Let me cut to the jugular. You may very well own Microsoft (Nasdaq: MSFT ) -- it's one of the most widely held stocks in the country. Now can you honestly explain to me how the world's leading software company will be as relevant in 2012 as it is in 2009?
Sure, there will be a wider audience of computer users in three years, but they aren't as likely to rely on Microsoft. Between open-source operating systems, free cloud-computing knockoffs of Microsoft Office, and a growing number of Web browsers, Microsoft will only continue to relinquish market share in many of its high-margin businesses. I can see MSN finally turning a profit by then. The company's Xbox franchise could definitely be more relevant. However, by and large, Microsoft will never be as important as it used to be. It has a crosshairs tattoo, and everyone is taking a shot.
The other side of the Microsoft coin is Google (Nasdaq: GOOG ) . Now, here is a company that can clearly matter more in three years. The leading search engine is growing revenue and market share, even as the global ad market is faltering. It may be retreating out of old-school ad markets like print and radio, but its role as a localized lead generator will only improve in time.
Dig for disruptors
Every company believes that no one else can build a better mouse trap. Shareholders know better. Disruptors always come along. Heck, even disruptors get disrupted. Remember when AOL owned online connectivity, and eBay (Nasdaq: EBAY ) revolutionized consumer-to-consumer commerce? Speedier AOL alternatives and the proliferation of Craigslist-esque eBay slayers turned the hunters into the hunted.
If you want to beat the market, the first step is to stay ahead of the market. Where are the disruptors today? They're everywhere, if you know where to look. Here are four I'm eyeing:
- Axsys Technologies (Nasdaq: AXYS ) is raising the stakes in the surveillance market with its high-performance cameras.
- China Finance Online (Nasdaq: JRJC ) is growing quickly as a provider of premium stock market research in a country that is warming up to the merits of free markets with unsophisticated investors hungry for an edge.
- AeroVironment (Nasdaq: AVAV ) is making waves in the military with its unmanned aircraft vehicles, sparing lives in recon missions.
- NetScout (Nasdaq: NTCT ) is the niche leader in helping companies monitor uptime for high-speed networks, something that will be even more important as more transactions go online.
How did I come across these disruptors? Well, I'm one of the analysts on the Motley Fool Rule Breakers newsletter team. Two of these stocks -- China Finance Online and AeroVironment -- are active recommendations. Subscribers can also unearth superior growth stock ideas on the lively discussion boards, where members pick apart potential winners.
These are companies that I can see mattering a lot more in the future. They specialize in niche industries that can take down -- or revolutionize -- larger sectors. They pass my three-year test.
Sorry, Microsoft. You flunked with fading colors.
Join me and my fellow subscribers in sniffing out the next wave of market-thumping disruptors. I invite you to check out Motley Fool Rule Breakers free for the next 30 days.
Longtime Fool contributor Rick Munarriz is a fan of disruptive growth stocks and has been part of the Rule Breakers analyst team since its inception nearly five years ago. He owns shares in NetScout. Microsoft and eBay are Motley Fool Inside Value selections. China Finance Online, Google, and AeroVironment are Motley Fool Rule Breakers selections. eBay and Axsys Technologies are Motley Fool Stock Advisor recommendations. The Fool has a disclosure policy.