Picks, Shovels and European Smaller Companies Investing
Phil Macartney and Mark Heslop find a rich vein of opportunity in European smaller companies and discuss why it makes sense to supply picks and shovels in a gold rush.
The gold rush created enormous excitement, as prospectors and investors went in search of fortune. However, the real winners weren’t the gold mine owners or the landlords who leased the land but rather individuals such as Samuel Brannan, who became a millionaire selling picks and shovels to miners, and companies such as Levi’s (Levi Strauss travelled from Germany to California), which began providing durable clothing to workers.
Both Brannan and Strauss were able to profit from growth in the overall industry by providing critical products and services.
California is once again the centre of investors’ attention, and this time the excitement is about silicon. With the Magnificent 7 stocks (Apple, Microsoft, Nvidia et al) and the explosion of data creation, manipulation and storage, we see many parallels with the original gold rush. Generative AI and related services are turbo-charging data consumption, and the companies providing the tools that create and store this data stand to benefit most from the growth opportunity. European companies again are among those providing the “picks and shovels” – this time to the technology sector.
However, California’s Silicon Valley is not the only site of a current gold rush – we see structural growth in other areas around the globe. For example, health efficiency and the ability of blockbuster products to help reduce healthcare spending remains a focus given ageing populations and indebted governments. As with the technology sector, stock market participants tend to focus on the headline names, for example Lilly and Novo Nordisk, when looking at the growth of GLP-1 based obesity drugs. But delve beneath the surface of the industry and analyse the supply chain (as we do), and one will find again some highly attractive “pick and shovel” makers in the European Smaller Companies space.
Swiss company Bachem manufactures the “P” (peptide) in the GLP-1 name – the key active ingredient for the drug. Capacity is in short supply in this industry and, with their reputation for quality and delivery, Bachem stands to benefit from the booming industry, we believe.
Example of a VAT valve (Image supplied by company)
Products designed in
As we look across our portfolios, we see numerous other examples of pick and shovel makers: Weir Group (mining equipment), Carel (control units for HVAC equipment), Tecan (sophisticated diagnostic machines for labs) and engcon (innovative tiltrotators to the excavator industry).
We believe our portfolio is rich with businesses that have important attributes. One might say, why not buy the company that is at the forefront of development — or the large cap names we have all heard of? Because, as in the gold rush of the 1840s, we believe that by buying the pick and shovel maker, you are betting not on a single ultimate winner in the industry but on the entire industry winning.
Structural growth
The European Smaller Companies sector is rich with businesses such as these. However, the focus on the Magnificent 7 and Super 6 in Europe has meant less attention has been paid to this area of the market. We believe this allows investors to find businesses exposed to the same growth themes as well-known large caps — at more attractive prices. It also allows investors, in our view, to diversify their risk, as often these companies provide for the entire industry, rather than being reliant on a single customer.
European Smaller companies investing is a unique area of the global stock market, and we firmly believe our quality growth philosophy and process provides access to these pick and shovel businesses in a focused and concentrated way, allowing our clients to take partake in gold rushes around the globe.
Example of a Gerresheimer pen. (Image supplied by company)
Please note that holdings examples are for illustrative purposes only and are not a recommendation to buy or sell. Not all of the companies examples are held in all of the portfolios managed by the investment team.
Jupiter European Equities
Jupiter European Equities
Jupiter European Equities
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