Thesis in Focus: Picks & Shovels

The Thesis Portfolio team are keen not only to identify high growth sectors for investment but also to select the companies most likely to succeed in the space. Companies pursuing ‘picks and shovels’ strategies basically have a business model aimed at providing the necessary ancillary goods and services to whoever is looking to win a piece of a fast-growing trend.

In the past few decades, we have seen some very powerful investment trends totally transforming a number of industries, often enabled by advances in technology. Some very big winners have emerged out of this change, who now enjoy effective monopoly positions, which is a dream-come-true scenario from an investment standpoint. But in this absolute bun fight for dominance - for example, to be where Facebook or Amazon or Apple are now - there were literally thousands of companies that started out, setting out their stalls and investing lots of hope and money to be the winner.

The truth is the vast majority didn’t make it very far at all. The familiar dynamics of very few winners emerging from a booming trend has been repeated again and again across many sectors over decades: in any gold rush, lots of competitors enter the market with big dreams, trying to land grab as fast as they can but sadly only a few emerge triumphant eventually. So when looking for investments with great prospects, in any given “gold rush”, we believe more people get rich from the less obvious beneficiaries (selling ‘picks and shovels’) than from mining for ‘gold’! These companies often provide underappreciated exposure to high growth high profile trends but in a far lower risk and sustainable way.

Pouneh Bligaard, Director, Head of Research, Thesis Portfolio.

It’s interesting to note that this picks and shovels business strategy is nothing new. Originally, this strategy comes from The Levi’s story, which is the stuff of legend. During the California gold rush of the late 1870s, Jacob Davis and Levi Strauss wanted to cash-in on the action, but wisely, they didn’t grab their tin pans and head for the hills. The two men invented the riveted-pocket work trousers we know today as jeans. But what’s more important in the story is what the men didn’t do. They didn’t bother to pan for gold at all. When you pan for gold you have a slim chance of a big payoff. For most gold miners, life was very hard, and the vast majority came home with dashed hopes and nothing to show for it having bet everything! But if the miners had taken the Levi’s approach, they would’ve prospered off every single prospector who came through town - regardless of who eventually ended up with the largest gold haul. Levi’s was selling picks and shovels… in their case jeans, of course.

Taking the gold rush metaphor, when you pan for gold, you gamble the entire business on a single moon-shot. One binary bet - works or it doesn’t. Customers love it or hate it. Picks and shovels businesses are different. The picks and shovels businesses are far less glamorous sometimes, but they enjoy the consistency of upside and a significantly larger chance of success. Look at credit card processing companies. They are far lower risk as they are not tied to any particular fashion or product: credit cards don’t care what you buy. They get a percentage of every sale, on both the buying and lending side of the transaction - double-scoops of picks and shovels.

It is sometimes easier to spot a growth industry than to determine who the winners and losers will be, especially early on. But by focusing on companies adopting the picks and shovels strategy, we are far more likely to make profitable investments given the business model’s greater certainty.

This material is not investment research in accordance with the legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research; and as such is considered to be a marketing communication.

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