California in the 1840s was at the centre of the gold rush, which created enormous excitement, as prospectors and investors went in search of their 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, or, put more simply, technology. With the Magnificent Seven 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 artificial intelligence (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.
During this current gold rush, European companies once again are among those providing the ‘picks and shovels’.
Critical tools
Large companies such as ASML or ASM, two the world’s biggest suppliers to the semi-conductor industry, tend to get all the plaudits, but in Europe’s smaller companies universe there are several standout names providing critical tools and infrastructure to the supply chain.
There are two Swiss companies which, we believe, are well-placed to benefit from this structural trend. Firstly, VAT, the world’s leading vacuum valve producer, will see increased demand as more tools require high-integrity vacuums, with its valves (picks) being critical in getting to those ever-smaller node sizes.
The second, Comet, stands to benefit meaningfully from the AI revolution as more complex chip architectures are required, and in turn its plasma technologies become even more integral to the manufacturing process.
However, California’s Silicon Valley is not the only site of a current gold rush – we see structural growth in other areas. 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 and one can uncover 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 and, with its reputation for quality and delivery, we think Bachem stands to benefit from the booming industry.
Dig deeper still into the GLP-1 supply chain and you find two German companies, Schott Pharma and Gerresheimer, which supply the devices (vials, synergies and injectable pens) that allow the drugs to be administered. These devices are designed into the manufacturing process, verified by the regulator and therefore hard to displace once the contract is won. This gives the companies and investors like us confidence in the future cashflows and growth trajectory of these businesses. Furthermore, there is a large and growing pipeline of biologic drugs in addition to GLP-1s that will drive demand for their products.
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). The European smaller companies universe is rich with businesses that have important attributes.
One might ask, 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
By buying businesses that can grow along with industry volumes and more importantly provide unique and critical components for the industry’s infrastructure, you reduce the competitive (or regulatory) pressures often faced by the larger players, yet still benefit from the structural growth of the sector.
Our view is that investors will be rewarded by owning businesses that provide a specific service or product to the industry, where the competitive moat is high, where the products are ‘under the floorboards’ of the customers and where the industrial niche is relatively concentrated.
The European smaller companies sector is rich with businesses such as these. However, the focus on the Magnificent Seven in the US and the Super Six 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 to diversify their risk, as often these companies provide for the entire industry, rather than being reliant on a single customer.
European smaller companies comprise a unique area of the global stock market, and with a quality growth philosophy one can access these ‘pick and shovel’ businesses and thus partake in gold rushes around the globe.
Phil Macartney is an investment manager, European equities at Jupiter Asset Management. The views expressed above should not be taken as investment advice.