What is the “Picks and Shovels” Approach to Investing in Stocks?
Plus a Gold Driller Stock to Buy.
Synopsis: In this article, I define the Picks and Shovels approach to investing in stocks, how to find “picks and shovels” stocks, detail a unique gold drilling stock opportunity, Geodrill Limited (GEO:TSX), provide a number of real examples including, Shopify Inc. (SHOP:TSX), NVIDIA Corp. (NVDA:NASDAQ), and Argan (AGX:NYSE), and tease two recent unknown gold related picks and shovels stocks include a highly profitable gold related stock with over 40% of its market cap in cash and a PE ex cash of under 5 + an undervalued driller trading at under 6x earnings with huge EPS growth expected in 2025.
Mark Twain is credited with saying, “When everyone is looking for gold, it’s a good time to be in the pick and shovel business.”
The “picks and shovels” approach to investing in stocks, involves buying companies that provide the tools, services, or technologies needed to support a larger industry, rather than investing directly in the major product or service businesses.
The strategy is rooted in the gold rush of the mid-1800’s.
“Gold! Gold! Gold from the American River!”
Fevered cries could be heard daily from, San Francisco newspaper publisher and merchant Samuel Brannan as he paraded through the streets of San Francisco holding aloft a vial of gold. Rumours of the gold discovery were confirmed in March 1848, starting the Californian Gold Rush, where over 300,000 people came to California with gold in the eyes and the dream of becoming rich. Only a handful succeeded, and Samuel Brannan was one of them. In fact, he became the first millionaire of the Gold Rush, not by mining the gold, but by capitalising on the needs of miners, and selling them picks, shovels, and pans.
When you pan for gold, you are betting everything for a big windfall. One binary outcome. It either works or it doesn’t, customers either love it or hate it. Extend this to investing in gold exploration stocks. They either hit gold or miss. It is boom or bust and very high risk. But if you buy a stock that services gold explorations companies, one that mills, drills, or provides software to exploration or production companies, they get paid hit or miss.
With gold at record highs, we included a “picks and shovels” gold service stock one can buy today below. The picks and shovels businesses are, of course, less glamorous, but their consistent profitable growth often has a higher chance for success.
Where The Real Money is Made
These kinds of companies have a huge advantage. They profit from broad industry success rather than a single winner.
Some of the biggest companies in the world are built on this business model:
Consider Shopify Inc. (SHOP:TSX)
The trend: Millions of businesses needed a way to sell online. Shopify provided the tools. Today, SHOP powers billions in transactions and takes a cut from every sale.
Investor who identified the stock early have made massive profits. Since IPO, the stock is up over 4,000%. $1,000 invested in 2015, when Shopify went public, would be worth approximately $40,962 today.
Take NVIDIA Corp. (NVDA:NASDAQ).
The trend: Every AI company needs massive computing power and Nvidia’s chips are the industry standard.
No matter what company(s) win the ace AI race, they all run on Nvidia. That’s why shares jumped 1,359.58% in five years.
Or consider a recent recommendation of KeyStone’s, Argan Inc (AGX:NYSE).
The trend: AI data centers require vast amounts of power due to the complexity of AI computations, specialized hardware, cooling requirements and large-scale data processing.
Argan Inc (AGX:NYSE) provides traditional and renewable power infrastructure and services across nearly the entire energy industry. The company’s power services, comprising Atlantic Projects Company and Gemma Power Systems, made up almost 73% of sales in fiscal 2024. The segment includes engineering, construction, development and consulting services for the likes of energy facilities and data centers. It offers low-carbon and zero-carbon fuels, such as solar facilities, wind farms, biomass projects, gas-fired power plants, battery and waste-to-energy facilities.
In March 2024, our identified Argan as a picks and shovels small cap stock poised to benefit from the surge in energy demand driven by AI infrastructure data centers.
Argan (AGX:NYSE) Recommended Price: $49.85
At the time Argan traded with attractive valuations on a trailing (past 12-month) basis including a P/E of 18.39, P/EBITDA of 13.22, EV/EBITDA of 9.34, and a P/S of 1.18. The company had a very strong balance sheet with cash and liquid investments totaled $397.5 million and balance sheet net liquidity was $240.2 million with no debt.
Argan has jumped 287.42% in 14 months since KeyStone’s “picks and shovels” buy recommendation to clients.
Below is a snapshot of the company’s tremendous Q4 2024 growth. Along with a look at Argan’s growing cash balance and surging backlog. Argan is an excellent example of how identifying a “picks and shovels” stock servicing a booming segment can be very rewarding.
Below is a snapshot of the company’s tremendous Q4 2024 growth.
Along with a look at Argan’s growing cash balance and surging backlog.
Argan is an excellent example of how identifying a “picks and shovels” stock servicing a booming segment can be very rewarding.
How to find “picks and shovels” stocks.
1. Identify the trend
Your starting point is to identify the right trends. Make sure the trend is economically significant and reasonably sustainable. If the trend you’re investigating doesn’t have a big economic impact, there is little chance stocks that supply or service the trend or segment will is a profit boom. Recall Samuel Brannan and the California Gold Rush: gold fever was a national phenomenon attracting people from around the world to dream of a fortunes in California. While rare, it was a trend where big fortunes were made. If there isn’t money to be made in a trend (the golden carrot), then there won’t be that much demand for suppliers to keep that trend going.
Trend examples include the Internet, AI, data centers, cybersecurity, electric vehicles, crypto, and the rise of gold.
2. Find market leaders
Once you have found a significant, market-moving trend, you want to identify the market leaders in that segment. Take a look at an investing website such as TradingView and either search the trend itself or look into the sub-the sector to identigy the largest players. For some trends, the players are well known – in the AI space, most people can identify knows Microsoft (MSFT:NASDAQ) and Alphabet (GOOG:NASDAQ). In other sectors such as gold service stocks or cybersecurity (Fortinet (FTNT:NASDAQ) may be less obvious.
3. Discover which products or services are essential to those businesses
After identifying market leaders, focus on the products that they sell. Determine was is essential to the product or service. Is there something that the market leading companies would not be able to function without? For Microsoft and Alphabet in AI, data, servers, and high-end chips (GPUs). For gold companies, it can be drillers.
Access KeyStone’s Most Recent Update on Geodrill (GEO:TSX)
Updated GEO research report with full analysis of Q1 2025 results, new (BUY/SELL) rating, analysis, and fair value. Do not miss out!
4. Research the companies that make those essential products
Once you discover the essential products or services the market leaders in the trend cannot live without, find out who is supplying the essential components or services. For AI, one of the key components are GPUs (Graphics Processing Units), which are powerful chips that accelerate graphics rendering and processing. If all the major competitors share the same supplier of an essential component, you know you have found a well-protected supplier. If you see foresee a boom in gold demand, drillers are essential to increase existing and find new deposits.
5. Screen your “picks and shovels” stocks for profitable growth.
After identifying a group of essential component or service providers, it is critical to find the most profitable growth companies with strong financial metrics including a good balance sheet and strong margins relative to its peers. Our example below possesses a solid balance sheet, growth, and peer leading margins.
Trend: Gold price hits record high, intermediate and senior producers as flush with cash and need to replenish gold reserves to meet high demand.
Follow these simple steps and you may find a great picks and shovels stock.
Gold Price Boom Creating Generational Picks and Shovels Opportunities:
Our first recommendation has already gained over 60% over the past year.
Picks & Shovels Pick
| Recommended | Recommended Price | Current Price | Industry |
|---|---|---|---|
| Feb 2021 | $1.60 | $3.56 | Metals & Mining |
| Market Cap | Shares Outstanding | Fully Diluted | Dividend Yield |
|---|---|---|---|
| $167.42 M | 47,160,000 | 47,149,236 | N/A |
Established in 1998, and headquartered in Douglas, Isle of Man, Geodrill provides mineral exploration drilling services to mining companies in West Africa, Zambia, Egypt, and Peru. It offers reverse circulation, core, air-core, deep directional, reverse circulation grade control, water borehole, underground, mine blast hole, and horizontal drilling services. The company operates a fleet of multi-purpose, core, air-core, grade control, and underground drill rigs; boosters and auxiliary compressors; and various support vehicles, such as pick-up, MAN, and other trucks, as well as purpose-built crawler mounted support vehicles and bell tractors. The company’s client mix is made up of senior mining, intermediate, and junior exploration companies. At present, Geodrill has a rig fleet of 97 drill rigs and also rents 1 rig for a total of 98 rigs.
GeoDrill’s Q1 FY 2025
- Revenue increased by 21% to $48.8 million from $34.7 million. The quarter produced record revenue due to increased drilling activity, largely due to multi-rig, multi-year contracts and record-high gold prices. The company had a very high rig utilization of 75%.
- Gross profit increased by 82% to $13.6 million. Gross margin increased to 28% from 21%.
- EBITDA rose by 104% to $13.6 million from $6.7 million due to the higher gross profit, partially offset by a $1.1 million increase in SG&A.
- Net income increased by 164% to $5.6 million from $2.1 million.
- EPS rose to $0.12 from $0.04.
Investment Summary
- Continued strong operational and financial performance as rig utilization came in at 75%, coupled with record gold prices, resulting in record revenue levels.
- The macroeconomic backdrop has improved significantly as the gold trades at ~$3,250/oz. Senior and intermediate gold producers are printing cash and with global reserves depleting, both the need and incentive to drill have never been greater. The capital markets for junior miners remain relatively weak; if juniors strengthen, Geodrill will likely benefit directly through contracts or indirectly through increased pricing power.
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To summarize.
The pick-and-shovel strategy can provide a way to participate in a booming industry without the risks associated with predicting which company, product or technology will be successful. Rather than betting on the success of a specific industry or product, investors focus on the companies that supply the essential tools, equipment, or services needed for that industry to function.
While picks and shovels stocks may seem boring, they are often more consistently profitable and their returns including over 4,000% for Shopify Inc. (SHOP:TSX) and nearly 300% in Argan (AGX:NYSE) in just 14 months are the farthest thing from it.
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