Disruptive innovation is one of my favorite investing terms. Why? Because if you spot it early enough, it can make you rich.

In the business world, "disruptive innovation" is something that changes the way we live. It's indoor plumbing unseating the outhouse. It's Netflix (NASDAQ:NFLX) changing the way we rent movies, and uprooting much larger competitors in the process. It's Apple's (NASDAQ:AAPL) iPhone. It's Starbucks (NASDAQ:SBUX), two decades ago. It's the company that shakes up the status quo -- and, when we can spot it early on, it's an amazing investing opportunity.

Make way for the stealth whippersnappers
Larger companies often ignore the companies creating disruptive innovations -- dismissing these small, seemingly insignificant shops because the market they're after seems puny, and their business practices seem silly compared to the established way of doing things.

Big mistake. When an up-and-comer succeeds with something new in an existing marketplace, you have what author Clayton Christensen (of The Investor's Dilemma and The Innovator's Solution) calls "new market disruption" -- a small business that targets customers whose needs the industry big guns aren't adequately meeting.

Imagine spotting Apple or Netflix early on when they weren't making a racket. Here's how we do it in our aptly-named Rule Breakers service.

Unmasking an undercover giant
Let's look at the market for tight-fitting athletic wear that wicks sweat away to keep you dry. You might assume that Nike (NYSE:NKE), Hanesbrands (NYSE:HBI) (owner of the Champion label), Adidas, or even Columbia Sportswear (NASDAQ:COLM) control that slice of the performance athletic gear market.

Guess again.

The hands-down winner -- controlling a 79% market share -- is Under Armour (NYSE:UA), a $1.4 billion company. Compare that to Nike's far more visible $28 billion market cap!

Under Armour's product was nothing special. It blended some high-quality polyester (materials that move sweat away from the skin, where it then evaporates) to make light clothes that keep athletes comfortable. These fabrics were nothing new, but the concept of helping athletes to stay cool and dry was downright innovative.

In the meantime Nike, Reebok, et. al. didn't even flinch. They should have been sweating bullets.

How to make the big guys break a sweat
Under Armour practically invented the lucrative "compression sports apparel" market.

Eventually, the competition took notice. Nike came out with Dri-FIT, Adidas made TechFit, and Reebok (owned by Adidas) created PlayDry. Fortunately for Under Armour investors, they were pale imitations of a widely recognized brand, as the numbers bear out:


Market Share

Total Revenue (in millions)

Under Armour









Vital Apparel*



Sources: Sportscan and Capital IQ, a division of Standard & Poor's.
*Privately held.

Bring on the competition
Clearly, others of all shapes and sizes want a piece of Under Armour. Great! Their involvement gives Under Armour two key benefits:

  1. It creates a rising tide. Sales of compression outfits are exploding! Nonexistent a decade ago, they now represent the fastest-growing segment of the sports apparel market, and Under Armour is synonymous with this type of gear. Further exposure will only help the best brand in the business.
  2. It keeps spurring Under Armour to innovate. The company isn't content to dominate compression apparel. It's now branching off into performance footwear and European markets. If it can enjoy just a fraction of its former success, shareholders should be richly rewarded.

You can keep cool by reading about Under Armour and similar businesses are poised for greatness. Our Rule Breakers team, led by Fool co-founder David Gardner, works to uncover companies positioned for this type of hypergrowth. You can see every single recommendation -- including the two top picks for new money -- free of charge with a one-month trial. Simply click here.

Wade Michels doesn't break a sweat disclosing the stocks that he owns -- none of which are mentioned in this article, by the way. Under Armour is a Rule Breakers and Hidden Gems selection. Starbucks is an Inside Value and Stock Advisor pick. Columbia Sportswear is a Hidden Gems selection. Apple is a Stock Advisor pick. The Fool owns shares of Under Armour and Starbucks. The Fool's disclosure policy is as cool as the other side of the pillow.