California in the1840s was the centre of attention as gold was found “in them thar hills.”

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.
Critical tools
Large companies such as ASML or ASM 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. Two Swiss companies are prime examples, we believe. 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. 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 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.
VAT Value Tools

Example of a VAT valve (Image supplied by company)

Products designed in

Go a little further into the GLP-1 supply chain and you find 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).

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

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 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.

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