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 Starbucks (Nasdaq: SBUX ) -- it's one of the more widely held stocks in the country. Now can you honestly explain to me how the market leader in pouring out premium java will be as relevant in 2012 as it is in 2009?
Sure, we may very well be consuming more lattes in three years, but they will likely come from a wider realm of brewers. Even if you believe that the company can ramp up its menu with items like oatmeal and smoothies to expand its magnetism, all that will do is dilute the brand. The company isn't closing down stores and trimming payroll because it sees a brighter future. Why should investors?
The other side of the Starbucks coin is Green Mountain Coffee Roasters (Nasdaq: GMCR ) . Now, here is a company that can clearly matter more in three years. The company is growing quickly with its Keurig machines that brew single-cup portions of premium coffee with its proprietary K-cup refills. The company sold more than twice as many brews over the holidays as it did the year before. How many of those do you think were snapped up by ex-Starbucks customers?
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 Crocs (Nasdaq: CROX ) were the cozy footwear of choice? Speedier AOL alternatives and a fashion shift away from ugly hole-punched shoes 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:
- salesforce.com (NYSE: CRM ) is giving companies a cheaper way to run enterprise software by running the applications on salesforce's servers.
- Intuitive Surgical (Nasdaq: ISRG ) has run into a few speed bumps lately, but it's still revolutionizing the operating table with its robotic surgical arms that help increase the efficiency of surgeons and reduce fatigue.
- Rackspace (NYSE: RAX ) is growing quickly as a Web-hosting specialist at a time when more companies need a dependable online presence. Its fastest-growing business right now is hosting cloud computing applications.
- Smart Balance (Nasdaq: SMBL ) is a premium maker of heart-healthy buttery spreads that is actually gaining market share at a time when one would think that penny-pinchers would be gravitating to cheaper spreads. Eat your heart out, Starbucks!
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 -- salesforce.com and Intuitive Surgical -- 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, Starbucks. 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.
This article was originally published on March 3, 2009. It has been updated.
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 does not own shares in any of the stocks in this story. salesforce.com, Intuitive Surgical, and Green Mountain Coffee are Rule Breakers selections. Starbucks is a pick in both Motley Fool Stock Advisor and Inside Value, as well as a Motley Fool holding. The Fool has a disclosure policy.