What's the difference between an economic expansion fueled by top-line revenue growth and an economy that depends on cost-cutting and extraordinary gains in productivity for its growth? The first results in a strong economy and stock market that lifts the fortunes of well-run companies and inefficient companies alike, much like we witnessed in the 1990s. The second results in an economy and stock market plagued by slow growth, relentless global competition and rising prices for energy and raw materials. In that environment, inefficient producers are toast. At the same time, disproportionate shares of corporate profits go to the most efficient companies in a given industry. They're able to use the earnings that come from higher margins to reinvest in new capital equipment and faster new product development. That's the economy I believe we face for the next 10 years. The result will be a winner-take-all stock market where the shares of sector winners will gradually pull further and further away from the pack. How do you pick winners in a winner-take-all market? First, it's critical to understand the trends that have created this economic situation. Then, you have to be able to identify the companies that are using research and development budgets to create new products to profit from those trends. Here they are.
Productivity gains fuel corporate profits
Corporate profits are surging, no doubt about it. According to the U.S. Department of Commerce, pretax corporate profits climbed by 29% in the fourth quarter of 2003 over the same quarter in 2002. For all of 2003, pretax corporate profits grew by 18%.