Pick-and-Shovel Stocks

Building a solid foundation: the importance of pick-and-shovel stocks in your portfolio

Pick-and-sshovel stocks refer to companies that provide essential tools, equipment, or services to an industry rather than directly participating in the primary activities of that industry. This term originates from the California Gold Rush era, where while many gold miners struggled to find significant amounts of gold, those who sold picks and shovels to the miners consistently profited.

Here are several reasons why pick-and-shovel stocks can be interesting investments:

• Stability and Diversification: Pick-and-shovel companies often have a broader customer base and are less susceptible to the cyclical nature of commodity prices or the specific fortunes of individual mining or industry companies. This can provide stability to their revenues and thus their stock performance.

• Essential Services: These companies provide essential tools, equipment, or services that are necessary for the operation of an industry. Regardless of whether a particular company strikes gold (or any other resource), they will still need the tools and equipment provided by these pick-and-shovel companies.

• Scalability: Pick-and-shovel companies can often scale their businesses more easily compared to those directly involved in resource extraction or other primary industry activities. As demand for resources increases, the demand for tools, equipment, and services provided by these companies also tends to rise.

• Lower Risk Exposure: Compared to companies directly involved in resource extraction or other primary industry activities, pick-and-shovel companies often have lower operational and regulatory risks. They are less exposed to factors like resource depletion, environmental regulations, or geopolitical instability that can directly impact resource extraction companies.

• Benefiting from Industry Growth: Pick-and-shovel companies can benefit from the growth of an industry without bearing the same level of risk associated with direct involvement. As the industry expands, the demand for their products and services increases, potentially leading to revenue and profit growth.

• Innovation and Technological Advancements: Pick-and-shovel companies often focus on innovation and technological advancements to improve the efficiency and effectiveness of their products and services. This can give them a competitive edge and make them attractive investments in industries where technological innovation is crucial for success.

Examples of pick-and-shovel quality stocks in different industries

Semiconductors

Software design: Cadence / Synopsys - a stock duel can be found here

Machine manufacturers: ASML / Applied Materials / KLA Corporation

Biotechnology

Service and data: Medpace / IQVIA

Medical device: Agilent / Thermo Fisher

Cosmetics

Suppliers: Robertet / IMCD - analysis and stock selection on the whole cosmetics sector just here

Construction

Raw materials: Eagle Materials

Suppliers: Saint Gobain / Tecnoglass

Defense

Radar / sonar: Norbit / Hensoldt

Systems: Kongsberg

Cloud & AI

Chips: NVidia / AMD

Datacenter: Arista - a deep dive is just here

Electric Vehicles

Infrastructure: Kempower / Schneider / Alfen

Miner: Albemarle / Arcadium

Online Gambling

Software and services: Evolution (deep dive here) / Jumbo Interactive

Finance and investment

Data & ratings: MSCI / SP Global / Moody’s

Software: AJ Bell / Netwealth

Industry

Consumables and safety products: Delta Plus / Fastenal (deep dive here)

Automation: Kardex

Conclusion

As you can see from my portfolio (available here), I appreciate pick-and-shovel stocks. I believe in the stability and long-term growth potential of these stocks, as they often benefit from steady demand regardless of market fluctuations. Moreover, these companies tend to have solid fundamentals and established market positions, which further reinforces my confidence in their potential for sustainable returns.