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A new stock litmus test that can make or break blue-chips

The major stock averages are trading at fresh all-time highs, but don't take too much comfort in that if you're an investor. The shelf life of your stock holdings is getting shorter as algorithms keep getting cheaper.

We are witnessing a mass extinction of all kinds of businesses.

I am an Amazon Prime member. My wife and I trust it and find it wonderfully convenient, as do tens of millions of other people. But in retail, where profit margins have been under immense pressure, it doesn't take much of a hit to sales for earnings to take a beating.

The new litmus test I use before buying a stock is to ask, "Could Amazon get into this business?"

Litmus test
Prashanth Vishwanathan | Bloomberg | Getty Images

I ask the same thing of Alphabet, Netflix and Facebook. If you think the chances of the answer being yes are pretty high, then you understand that disruption is coming at us fast.

If Amazon bought a bank, do you think they'd be successful at online banking? What if it went into the business of filling prescription drugs? If I were a CEO of a bank or a drugstore chain, I'd feel a little paranoid. A business just needs to lose just 5 percent to 10 percent of its revenue to see its earnings turn into losses.

Facebook is now in live streaming. I know a bunch of people who are now using it, and believe me, it is gaining traction. As that technology improves, it virtually turns all of my friends into live broadcasters.

It took major hotel companies decades to reach hundreds of thousands of rooms. It took Airbnb only a few years to reach 1 million rooms. It doesn't mean that the brand-name hotel industry will disappear, but it could certainly move the industry into a position of overcapacity much quicker than investors expected.

"The new litmus test I use before buying a stock is to ask, 'Could Amazon get into this business?'" -Mitch Goldberg, president of ClientFirst Strategy

Faster disruption means investors need to adapt fast. Take a look at your portfolio. You probably use metrics like dividend yield, P/E ratio, book value and a few other standard measures to evaluate stocks. Now, take a look at the winners you have and think about who they are taking business away from to achieve their growth. Growth in a low-growth environment has to come from somewhere and it is usually by taking market share from incumbents.

If you take a look at the recent performance of Alphabet, Amazon and Facebook, it is clear they are taking business from any company that stands in their way. But let's be clear, since it's the height of tech earnings season: Whether blowout results or blow-up, how these stocks perform this quarter in particular isn't important to the argument about disruption.

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I haven't yet come up with a financial metric to measure disruption, but it doesn't mean I can't plan based on the assumption that disruptive trends are accelerating. Investors need to use a new variant of the old Murphy's Law: If something can be improved with disruptive technology, it will be. That's the first thing I look at to see if any of my stock holdings are at risk. I think financials, consumer discretionary and technology stocks top the threatened list, while staples, utilities, health care and energy are at less risk of rapid-fire destruction.

Remember the line spoken by Arnold Schwarzenegger's apocalyptic automaton: "You've been targeted for termination." There's an equally famous line from "The Terminator" that applies to your blue chips. The next time one of them takes an earnings fall, don't assume it will be able to say, "I'll be back."

For investors, long-term investments are becoming harder to justify compared with a speedier process of replacing stock holdings. This is a bigger threat in achieving your financial goals than ever before, but look at the bright side: For investors who learn to adapt, it's also going to be the biggest opportunity.

By Mitch Goldberg, president of ClientFirst Strategy

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