I Can Make You Rich in 3 Years

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.


Read/Post Comments (14) | Recommend This Article (101)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 03, 2009, at 8:19 PM, icestationzebra wrote:

    Dude - I wouldn't buy ANY of those stocks even with YOUR money! You have to be kiddin... Seriously, who among us should pass up Microsoft stock at HALF PRICE! Or, have you not heard the age old adage, Buy LOW, Sell High!

    Are you trying to tell us that MSFT will be stuck in the gutter where it is now for the next 3 years? I think not. Even if it only reclaims half of its earlier share price, which is not that hard to imagine, a person can still make nearly a 50% capital gain!

    I would rather buy Tata Motors, or the India Index Fund, or Oracle, or even GE than what you are suggesting. Check back with me in 3 years.

  • Report this Comment On March 03, 2009, at 11:56 PM, TMFBreakerRick wrote:

    icestationzebra -- and I love the name -- it's a date! I'll see you back here in three years. I hate to rain down on Microsoft, but if you see growth in Windows (at current pricing) or Office productivity software (at current pricing) in three years, then you are far more optimistic than I am in Microsoft's ability to compete to cheaper alternatives in the future.

  • Report this Comment On March 04, 2009, at 12:10 AM, TDUBFISH313 wrote:

    Microsoft is a cash cow. They'll just buy out their competitors.

  • Report this Comment On March 04, 2009, at 12:13 AM, SinCityScott wrote:

    Rick, I've owned mistersofty since...well...before you were born and I'm so glad I've never second-guessed their "ability to compete". PC's are not being replaced any time soon and when the market engine's start firing again you can be sure that market-share is still King. In the meantime I wouldn't put all my eggs in that basket either, but don't bet against 'em.

  • Report this Comment On March 04, 2009, at 1:36 AM, southard wrote:

    In the late 90's and up to say 2003 or so the fool was a great educational website. The educaton part isn't as good now. I believe their recommendations used to better to.

    The fool used to constantly teach about free cash flow, cash king margin, foolish flow ratio, etc... But their stock picking rarely places their money where their mouth is. By that I mean generally they gravitate and recommend speculative stocks that have had some really short term success. Most of their newsletter's success come from a select few stocks. So unless you can afford to buy each selection they make your returns won't be near as good as theirs because most of their stocks are under.

    Stick to your own research. MSFT and EBAY are at their best prices ever in terms of value and growth. Both will be slow growers (something fools never go for) but if you go to smart money's price calculator you will find they are indeed good deals based on conservative discount models. Also these are safe companies. MSFT has actually grown earnings over the last 5 years pretty good. I expect they will continue to grow earnings faster than the overall market. Nobody cares about linux. Too much knowledge switching cost. MSFT software is cheap anyway when you compare it to Adobe, Autodesk, etc...

  • Report this Comment On March 04, 2009, at 1:37 AM, southard wrote:

    Rick don't mean to keep dogging you but I look up and it always just happens to be your articles. Get over it MSFT and EBAY are going to be around in 5 years. I can usually find what I'm looking for cheaper on EBAY. Its thousands of small sellers with low overhead beating the crap out of the bricks and mortars......and even AMZN.

  • Report this Comment On March 04, 2009, at 11:19 AM, TMFBreakerRick wrote:

    Southard, I appreciate the feedback. I never suggested that Microsoft -- or eBay -- won't be around in 3 (or 5) years. My thesis is only that they will be less relevant, and therefore less valuable.

  • Report this Comment On March 04, 2009, at 11:46 AM, Richard233 wrote:

    Pricing on stocks reflects two things. First, revenue and earnings especially that which is paid out via dividends. Second, the expected growth based on conditions as they will be in the future. The reason to own stocks is that you either will see growth or you will received revenue above and beyond what you would get from other streams. Since the economy is shrinking, revenue is dropping, and most companies are losing value. MS is losing value as its operating system takes a higher percentage of the cost of owning the machine, thus making more likely to be supplanted. Ebay has reached the saturation point of customers and is making established customers unhappy by changing things that they like as well as raising fees in the hopes of continue growth. I expect both companies to be around for quite some time but I also expect their value to drop as they lose revenue streams.

  • Report this Comment On March 04, 2009, at 2:13 PM, ionux wrote:

    Rick, you are absolutely spot on. Nobody in the tech industry looks at Microsoft as innovators any more. The open source software movement has captured the hearts and minds of the current and next generation of software engineers. The market is shifting to SAAS and micro-payments. I know - I'm a software engineer that owns a successful consulting business doing just that.

  • Report this Comment On March 04, 2009, at 8:36 PM, Akiraiaia wrote:

    Thank you for this article. It's always good to be reminded to be vigilant and to take nothing for granted. Would we do so, many investors would have missed out on the MSFT and EBAYs when they were sure bets. And by the way i'm working for a very big company, a very big customer of microsoft and we have plenty of plans in place to move to alternatives, especially relevant in such times of required savings. After all msft software is a commodity unlike SAP or banking software.

  • Report this Comment On March 05, 2009, at 6:26 AM, 7footmoose wrote:

    Who will have the cash to fund or to purchase these innovative "disrupters"? I believe MSFT, which is not one of my personal favorites, is currently sitting on a huge wad of cash. Second, if the economy fails to correct its course, who will be investing in these company's products? Only the cash rich and maybe they should be our targets.

  • Report this Comment On March 05, 2009, at 12:29 PM, ReillyDiefenbach wrote:

    Investing in stocks now is foolish in the extreme. The Dow stands a good chance of going to 5000 or lower. It's down over 200 points this morning. The economy rules all, and it sucks big time. Wake me when companies start hiring.

  • Report this Comment On March 06, 2009, at 3:19 PM, kennyace wrote:

    I know i am not the smartest person in the world but i have a point to ponder. lets just say for chits n giggles these disrupters put the fear of god into companies like microsoft and ebay. by then these disrupter companies will have been making money and lots of it as well as gaining market share. i assume their stock prices will rise and then whoala micrsoft and ebay will then use their cash to buy these guys out making the early investors tons of profit..

    ok on another note i recently took a position working overseas and will come into some money to be invested for the next 4 or so years. and i do miss all the fool's tecnical investing ratios and the likes. i would like someone from the fool to contact me you have my email on file i have tons of questions reguarding stock advisor and hidden gems.

    thanks

    kennyace

  • Report this Comment On April 22, 2009, at 7:42 PM, diditbad100 wrote:

    As a former Stock Advisor subscriber I do have to agree somewhat with southard. Too many picks and I seemed to have the uncanny ability to pick the worst performers every time! Exel was touted as the next biotech stock to own, and it went south much faster than the overall market. I would probably have stayed a subscriber if I had $99 left after getting beat up in this market!

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