Unconventional wisdom: A top performing ‘AI share’ accidently ended up in my portfolio
Trying to make sense of a share caught up in irrational exuberance.
Mentioned: Cummins Inc (CMI)
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: A top performing ‘AI share’ accidently ended up in my portfolio
“During the gold rush its a good time to be in the pick and shovel business”
- Mark Twain
In August of 2015 I found a company that was right up my alley. It was conservative and boring with a history of steadily raising their dividend. I bought shares of the truck engine manufacturer Cummins (NYSE: CMI).
In April of 2025 things were working out for me. In the decade I owned the company the return matched the S&P 500 and the dividend grew 133%. That equates to an 8.84% annual increase which far outpaced inflation.
Then a funny thing happened. And trust me, I’m not complaining. Over the past year the shares are up 113%. Cummins has outperformed Nvidia by 36% since April of last year.
You may be wondering why a manufacturer of truck engines would see their share price surge 113%. It is a worthwhile question.
Is it their diversification into emissions systems, drivetrains, and brakes? Seems unlikely.
What has investors all hot and bothered are generators. This is not a new business line. Cummins started selling generators in the 1920s. Their customers include camper van owners, homeowners, manufacturing facilities and hospitals.
Recently a new type of customer has joined the list – data centres. That makes Cummins an unlikely beneficiary of the AI boom.
Picks and shovels
Approximately 300,000 people flocked to California in 1849 to strike it rich after gold was discovered. The relative scale of this migration was immense. There were only 15,000 non-indigenous people living in the state before the gold rush.
For most of these ‘49ers the gold fields brought lots of hardship and little gold. Yet some fortunes were made. Sam Brannan became California’s first millionaire by importing and selling picks, shovels and pans. Levi Straus sold durable denim clothing to the miners. Henry Wells and William Fargo created a financial institution to serve this throng of migrants.
The ‘picks and shovels’ approach became an enduring investing theme. Too many prospectors came to California to allow most individuals to amass enough gold to make money. In many bubbles ruinous competition makes it difficult to earn outsized profits for the direct participants in the boom.
Cummins is an example of a ‘picks and shovels’ investment and may be a case where investors have learned the lesson too well. About 10% of Cummins’ revenue comes from generators. It is still primarily a truck engine manufacturing play.
I am a firm believer in the ‘picks and shovels’ investment approach. First order thinking rarely works for long. Many of the companies that have surged during the AI boom are spending hundreds of billions on infrastructure buildouts.
Even obvious ‘picks and shovels’ plays like Nvidia have a tangled web of cross ownership and funding arrangement with their customers. Cummins is not in this category but can hardly be classified as a pure play AI supplier.
In 2025 Cummins’ earnings fell 4% on weakness in trucking markets. In 2026 company guidance indicates that earnings will grow 3% to 8%. It seems hard to classify the run up in the share price as anything but irrational exuberance.
This is a strong company. Cummins has a Narrow Moat Rating from our analysts. Their brand is strong with a reputation for quality and innovation. They have superior products and engineering advantages over competitors and have established deep and lasting customer relationships.
These are all the reasons that I bought the company in the first place. I did not have the foresight to imagine the AI boom drawing in investors fixated on a small portion of their business. Sometimes investing comes down to luck - it is nice when it is of the good variety.
As a shareholder I need to contend with elevated valuation levels. The average price to earnings ratio over the last five years was 17. The shares are currently trading at 30 times earnings.
To sell, or not to sell, that is the question
My default position is to never sell anything I own unless my thesis fundamentally changes. In this case it hasn’t. The company is delivering against my goal of increasing passive income at a rate exceeding inflation. All the qualities that caused me to buy the shares are still evident.
Yet I recoil at any hint of a bubble. This stems from my formative experience during the dotcom era. An established engine manufacturer should not be trading for 30 times earnings no matter how great of a company it is.
I expect the dividend to keep growing but the yield has dropped from more than 3% when I purchased Cummins to 1.27% today. The question is if I can get similar income growth with a higher yield and more reasonable valuation. I think I can and I’ve decided to sell.
Rules and structure are important for investors. That is why my default is to not sell. This high hurdle rate keeps me focused. But the principles that form the foundation of my investment strategy are more important than arbitrarily following a rule.
How much do I sell?
Cummins was a core position in my portfolio. Given the run up it is now a very large position and has breached my rule of keeping any single equity holding to less than 5% of my portfolio.
Given the position size there is an argument to be made to just trim the position. And the axiom that nobody goes broke taking profits holds a certain amount of truth. But if the main driver of a sale is an unrealistic valuation doesn’t logic dictate selling the whole thing?
I’m also aware that only a few shares drive most of the wealth generated by the market. That is the lesson from Professor Henrik Bessembinder’s research which I outlined last week. Letting your winners run holds as much truth as taking profits.
I still think Cummins is a great company and I’m going to just trim my position by 40%. The valuation of any share goes through cycles and I’m not a professional investor who needs to outperform over the short-term. I can wait out a future slump and focus on the long-term. There are also tax and transaction costs to consider.
Final thoughts
If there was a set of rules for investing that guaranteed success we would all spend our days cruising on our yachts. To be a successful investor means making continuous judgment calls over decades.
The best I can do is to establish the foundation needed to make structured decisions using the information at hand. This was not a snap decision. I’ve been watching Cummins’ share price climb over the past year.
I’m satisfied that my thought process was rigorous and appropriate. If the share price continues to rise I will gain little solace by reminding myself that process is more important than results – but that doesn’t mean it isn’t true.
My job gives me the freedom to write articles outlining my own dilemmas as an investor. Too many investors peddle a level of confidence and certitude that doesn’t exist in an uncertain world. I’ve been wrong before and could very well be wrong now.
The lesson is to try and be thoughtful about your decisions. And I would encourage everyone to follow a similar process that I have even if your conclusions are different. Putting your thoughts on paper can clarify your thinking. There are seldom decisions with an obvious answer. Writing things down can help you run through the ambiguity of the choices you are trying to make.
My last piece of advice is to try and isolate buy and sell decisions. A good deal of the overtrading that harms investor outcomes is based on shiny object syndrome.
The temptation to take advantage of the can’t miss opportunities that are constantly pitched means many investors are churning their portfolios because something needs to be sold to fund the purchase of something new. Take each decision in a vacuum.
I need to find something to purchase but that is a problem for another day. Let me know your thoughts on my decision at mark.lamonica1@morningstar.com
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What I’ve been eating
On my last trip to Japan I sat down at a random soba stall by Shinjuku Station. It turned out to be incredible and it was my first stop on my recent trip to Tokyo.
At Kameya Shinjuku the mission is clear. You slap the Yen equivalent of about $6 on the counter and the soba takes 30 seconds to prepare. Then it is head down eating. There is no conversation which is reinforced by a sign that says, ‘no talking.’ There isn’t time for anything superfluous when there is a line of hungry customers waiting for one of the eight seats. The only sound should be slurping noodles. When you are done you wipe the counter clean and the next person sits down.
Soba, tempura fried vegetables and a soft-boiled egg in a dashi broth. No choices and no substitutions. Vegetarians, vegans and various other selective eaters are told politely, but firmly, to get lost.
