The report from the Census Bureau released on September 17 didn't have any of the drama of Wednesday's "no taper" decision from the Federal Reserve. But for investors looking for a strategy with a shelf life longer than a couple of weeks, I believe the Census Bureau report on household incomes is a far more important guide.
Why? I believe it tells investors exactly what the ideal company is now and what it will be for the next few years. Now, all we investors have to do is find one. Don't worry: I've actually got a candidate -- Cummins (CMI).
Here's what the Census Bureau report told us. Although the U.S. economy as a whole is 5% bigger than it was at its prerecession peak in 2007, household incomes are lower. The median household income is 8.3% below its pre-recession peak. The implications of this for the future are pretty clear. The Federal Reserve may have been able to generate modest economic growth by cutting interest rates so corporate costs would fall. That helped increase incomes and wealth for the top 1% of the U.S. population.
But growth remains stubbornly slow because incomes for most Americans haven't climbed very much. (Incomes for the top 1% in the United States climbed almost 20% in 2012, while incomes for the other 99% rose by just 1%, according to Emmanuel Saez, an economist at the University of California, Berkley.)
In this economic environment -- and with growth in Europe and Japan also slow, and economic growth in developing economies looking weaker rather than stronger -- the ideal company is one that can grow its revenue faster than GDP.
How? Things like taking market share from competitors. Things like new products that open up new markets, increase margins and take market share. Things like concentrations in markets or parts of markets that are growing faster than the national or global economy. That's the story Cummins told at its analyst day on Tuesday.
For example, this year Cummins will introduce a new 10/12 liter engine for the truck market in China. This high-horse power part of the Chinese market is the fastest growing segment in China and one where Cummins has relatively low market penetration.
Cummins is picking up market share in the U.S. and anticipates that it will see increased sales of components in Europe due to new regulations on diesel emissions.
Cummins also has introduced a natural gas-powered engine for the heavy-duty truck segment and is introducing a natural gas engine for the medium duty market (school buses, for instance.)
The result is that management believes it can grow revenue above rates of GDP growth in its major geographies. The company's targets work out to 8% to 12% revenue growth with 2 to 3 percentage points of growth coming from new products and another 1 to 2 percentage points of growth coming from gains in market share.
To take those figures to a specific segment, its components business. Cummins expects revenue to grow at better than GDP growth rates due to market share gains with key customers (1 to 2 percentage points), increased component content with existing customers (2 to 4 percentage points) and new products (2 to 4 percentage points.)
I think this adds up to a pretty good model for a tough, relatively slow growth global economy.
Now to find just a few more companies and stocks that match up equally well with that model.