There are really only two types of companies out there: the disrupters and the disrupted. Which type occupies your portfolio?
That's not an easy question to answer. Investors like 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 turning the tables -- and taking a bite out of the overly confident lions. That can be a costly mistake, because knowing the difference separates the market-beaters from the blindsided and vanquished.
Thankfully, there's an easy exercise to help you determine whether 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'll be able to sidestep losers today and load up on winners for tomorrow.
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 Yahoo!
Now, can you honestly explain to me how Yahoo! will be as relevant in 2012 as it is in 2009?
Last week's deal to outsource the site's paid-search ads to rival Bing is huge. The deal also lets Bing power searches on Yahoo.com itself. Yahoo! claims that the moves will add $500 million in annual operating profits -- so why did the stock lose 16% of its value last week?
Investors know what the company isn't saying. Outsourcing a search engine's core competencies may be a near-term windfall, but in the long run, it's a ticket to irrelevance.
So how confident should you be, buying into a company with an awesome past, a decent present, and a cloudy future? If I were you, I'd seek out companies that will be more relevant in future.
Dig for disruptors
Every company believes that no one else can build a better mousetrap. Shareholders know better. Disruptors always come along. Heck, even disruptors get disrupted. Remember when AOL owned online connectivity, and Barnes & Noble
If you want to beat the market, your first step is to stay ahead of the market. The disruptors today are everywhere, if you know where to look. Here are four I'm eyeing:
(NYSE:UA)reinvented athletic apparel when it introduced its moisture-controlling clothing. It has gone on to make a dent in footwear, aiming for the athletes that swear by Under Armour's sweat-snaring performance apparel.
(NASDAQ:OPEN)is revolutionizing the way restaurants fill their tables. The touchscreen reservation system -- tethered to its popular online reservations site -- is a winner. More than 10,000 restaurants have already migrated to the OpenTable platform, making the most of the network effect.
(NYSE:LL)sells hardwood flooring. This may not sound exciting, but the fast-growing chain has seen earnings break through the ceiling, at a time when most real estate-related retailers are languishing. As one of the largest hardwood specialists, Lumber Liquidators offers prices that smaller independents can't touch. The larger home-improvement superstores can, but who wants to deal with orange aprons for something high-end like hardwood floors?
(NYSE:TWP)has seen its stock more than triple since bottoming out in March. It's also a trailblazer in housing, with its proprietary outdoor decking and fencing products. As a green bonus, weather-resistant Trex products consist mostly of recycled bags, plastic, and fiber.
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 -- Under Armour and OpenTable -- are active recommendations. Subscribers can also unearth superior growth stock ideas on the lively discussion boards, where members pick apart potential winners.
I can see these companies mattering a lot more in the future. They specialize in niche industries that can take down -- or revolutionize -- larger sectors. In short, they pass my three-year test.
Sorry, Yahoo! 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. That's less than three years, but it's a great start!
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. OpenTable and Under Armour are Motley Fool Rule Breakers selections. Amazon.com is a Motley Fool Stock Advisor pick. Under Armour is also a Motley Fool Hidden Gems recommendation and Fool holding. The Fool has a disclosure policy.