Likewise, investing in properties like hospitals, medical office buildings, senior living facilities, and research labs can provide exposure to the growing demand for healthcare infrastructure. Investing in companies involved in manufacturing materials for renewable power generation, electricity transmission and distribution, or smart grid technology, offers exposure to the growing sustainable infrastructure sector.
Companies providing concrete, clay, plumbing, and heating supplies would be considered pick-and-shovel plays in the construction industry. These are just a handful of ways to take the pick-and-shovel approach if you want to leverage this strategy as you build out your portfolio.
What are the pros and cons of pick-and-shovel investing?
There are numerous advantages that individual retail investors can experience by incorporating the pick-and-shovel approach into their overall investing strategy. These include:
- Stability and lower risk: Pick-and-shovel companies often have a broader customer base and may be less exposed to the volatility and risks associated with directly investing in the main players of a particular industry or the final product.
- Diversification: By investing in companies that supply multiple industries, investors can potentially reduce risk and diversify their portfolios.
- Essential services: These companies provide essential products or services, meaning their demand may be more consistent, regardless of short-term fluctuations in the industry they support.
- Potential for undervaluation: Smaller companies supplying trending industries might be overlooked and undervalued compared to the prominent names, potentially offering investors a larger margin of safety and upside potential.
- Long-term growth: Pick-and-shovel plays can be suitable for investors with a long-term perspective seeking stable and consistent growth.
However, there are some potential cons to pick-and-shovel investing that some investors might want to consider. While less exposed to direct industry volatility, pick-and-shovel companies still depend on the underlying industry's health and growth. A prolonged downturn in the industry could negatively affect suppliers, too.
Some suppliers might rely heavily on a few major customers, so if one of these customers switches suppliers or experiences significant difficulties, the supplier company could suffer a substantial loss of revenue. While not always the case, some pick-and-shovel plays might offer more conservative returns compared to direct investments in highly successful companies at the forefront of that particular industry or sector.
