"What the heck is a kerchunker® company?" you ask. Kerchunker is a term trademarked by Runnymede professionals to describe service sector companies that are steady and often have recurring revenue models. Hopefully, each quarter and each year, they grow... kerchunk, kerchunk, kerchunk!
Services represent approximately 85 percent of the US economy and employs 90 percent of all workers. In addition to dominating the US economy, service sector companies share many positive characteristics that investors should appreciate. Here are 5 reasons why we love kerchunker® companies and think you should too:
- Recurring Revenue
Manufacturers receive a single payment for a product and need to sell more next year to sustain their growth. Many service companies have a subscription or recurring revenue model that provides more predictable growth.
Over time, products eventually become commoditized, lose pricing power, or become obsolete due to new products. Services tend to have higher customer loyalty. How often do you change banks or your lawn care company?
- Efficient Use of Capital
Service companies do not need to build factories or worry about volatile costs of raw materials. Services are more people intensive and less capital intensive.
Opportunities for entrepreneurship in modern economies are concentrated primarily within the service sector.
- Scalable Growth
Many service sector companies begin with a regional focus and can scale nationally and internationally.
I believe that these attributes are compelling reasons to slant your portfolio toward, or even invest exclusively in, service companies. If you do not wish to take my word for it, read this quote:
“We were being threatened at that time by Japanese competition in manufacturing. So we definitely had to get into services. We had to get away from products and move to greater financial services, product services, and networks/entertainment – as a services business provided great cash flow.
You are much better off moving up the food the chain, constantly innovating, fighting your way out of a me-too product. If I am an investor, I should be trying to figure out if a company has a unique competitive advantage."
-Jack Welch, former Chairman and CEO, General Electric
What do you think of service sector trends? What are your favorite kerchunker® companies?