Picks and shovels: Should you buy and hold these types of stocks? And which ASX stocks fit into this category?

You might have heard the saying that it is better to own companies selling ‘picks and shovels’ rather than companies mining for them. This article addresses this argument, which is much contested one conducted amongst investors.

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What is the picks and shovels argument?

The “picks and shovels” argument in equity markets comes from the idea that during a boom—whether a gold rush, an industrial wave, or a technological revolution—the most reliable profits often accrue not to the headline winners, but to the suppliers of essential inputs. Instead of betting on which miner finds gold, you sell picks and shovels to everyone who tries.

In equity terms, this means investing in companies that provide critical tools, infrastructure, consumables, or services to an industry experiencing rapid growth, rather than in the end producers whose revenues are more volatile and whose success is winner-take-most.

Why is this believed to hold?

The theoretical appeal is straightforward. Picks and shovels businesses typically benefit from volume rather than price. They sell to many participants, diversify customer risk, and often enjoy recurring demand as long as activity continues, even if individual operators fail.

Margins can be steadier, capital allocation more disciplined, and competitive advantages more defensible when the product is embedded in workflows or protected by switching costs. In contrast, end producers often face commodity pricing risk, technological obsolescence, regulatory exposure, and boom-bust capital cycles.

It is important to note that this concept originates from the 19th-century gold rushes in the United States and Australia, where merchants who sold mining tools, clothing, food, and transport often made steadier money than the miners themselves. Levi Strauss is the canonical example: he didn’t mine gold, he sold durable jeans to miners, and built a lasting business while most prospectors failed. The phrase “sell shovels, not gold” emerged as folk wisdom rather than theory, and only later migrated into investment thinking.

In markets, the idea was popularised informally by value investors and market commentators rather than formal academic finance. It appears implicitly in Benjamin Graham’s writing on avoiding speculative businesses, and later more explicitly in tech investing lore during the dot-com boom, when investors began contrasting failed internet start ups with profitable infrastructure providers. Venture capital and public-market investors adopted it as a mental model rather than a doctrine: avoid binary outcomes, sell to everyone who’s trying, and capture industry growth without betting on a single winner.

The application in the mining sector

In traditional mining, the argument has historically had real support. During gold rushes and commodity super-cycles, many mining companies destroyed shareholder value despite rising commodity prices, largely due to cost inflation, over-investment at cycle peaks, geological uncertainty, and political risk. By contrast, equipment manufacturers, explosives suppliers, engineering firms, and assay services often captured more consistent returns.

Companies providing drilling equipment, haul trucks, processing technology, or consumables like cyanide and reagents benefited from expanded exploration and production regardless of which miners ultimately succeeded. Empirical studies of mining equities have showed that returns are highly skewed, with a small minority of projects generating most of the value, while the median miner underperforms. Suppliers, while not immune to cycles, have historically shown lower volatility and better risk-adjusted returns across full commodity cycles.

That said, the argument is not universally true in mining. During sharp downturns, miners cut capex aggressively, which hits equipment suppliers hard, sometimes harder than producers who can idle operations and wait for prices to recover. The picks and shovels advantage works best when suppliers have pricing power, aftermarket service revenues, or exposure to operating expenditure rather than discretionary capital spending. When suppliers become capital-intensive themselves or face commoditisation, the advantage erodes.

Does this apply in other sectors? It does in tech!

In technology, the picks and shovels argument has been both powerful and misunderstood. Classic examples where it has worked include semiconductor manufacturing equipment, electronic design automation software, networking infrastructure, and more recently cloud infrastructure and data-centre components.

During multiple tech cycles, many application-layer companies failed or were displaced, while suppliers such as chip foundries, equipment makers, or core software vendors captured durable value by enabling the entire ecosystem.

The AI boom is a current illustration: many AI application companies may never achieve scale or defensibility, while suppliers of GPUs, memory, power management, data-centre cooling, and advanced manufacturing tools benefit from industry-wide investment regardless of which models or platforms dominate.

However, tech also provides strong counter-evidence. Picks and shovels suppliers can become consensus trades, leading to valuation excesses that negate their structural advantages. In several cycles, infrastructure providers underperformed once growth expectations normalised, even though their businesses remained strong. Additionally, platform companies sometimes integrate vertically, capturing supplier economics for themselves and weakening the independent picks-and-shovels layer. Unlike mining, technology evolves rapidly, and today’s essential tool can become obsolete far faster than a haul truck or crusher.

And others

Beyond mining and tech, the argument applies unevenly across sectors. In energy, oilfield services historically played the picks and shovels role, benefiting from drilling booms while avoiding direct commodity price exposure. Yet they have often delivered poor long-term returns due to brutal pricing competition, overcapacity, and customer concentration, demonstrating that being a supplier is not sufficient without structural advantages.

In life sciences, contract research organizations and lab-equipment providers have more convincingly captured picks and shovels economics by selling recurring, regulated, and mission-critical services across many drug developers, most of whom will never bring a product to market.

What ASX stocks fit in this category?

On the ASX, the mining and resources provides the cleanest and most historically grounded examples of picks-and-shovels businesses. Orica (ASX:ORI) is a classic case. It supplies explosives and blasting systems to miners globally. Its fortunes are tied to mining activity levels rather than the success of any individual mine or commodity, and demand persists across cycles as long as material is being moved. While cyclical, its economics have historically been more stable than those of many pure-play miners.

Another example is Imdex (ASX:IMD) as it provides drilling optimisation products, data, and consumables used across exploration and production. Its revenues scale with drilling activity rather than discovery success, and its value proposition is embedded in operational workflows, giving it some insulation from individual project failure.

Brambles (ASX:BXB), through its CHEP pallets business, is a less obvious but structurally similar example. Bulk commodities, agricultural products, and industrial goods all require logistics infrastructure. Brambles benefits from throughput and volume across industries rather than exposure to commodity prices themselves, making it a second-order beneficiary of resource and industrial activity.

In energy and decarbonisation, the picks-and-shovels idea shows up in companies that supply inputs to renewables, batteries, and electrification rather than producing the end commodity. Sims (ASX:SGM) benefits from metal recycling volumes driven by industrial activity and energy transition demand, regardless of which green technologies ultimately dominate. Similarly, Incitec Pivot historically functioned as a fertiliser and explosives supplier leveraged to agriculture and mining volumes rather than end prices, although strategic missteps weakened the model over time.

In technology on the ASX, examples are rarer because Australia has fewer deep infrastructure players, but they do exist. Xero (ASX:XRO) is sometimes framed this way for SMEs rather than tech itself: it sells accounting infrastructure to businesses regardless of which individual firms succeed. More directly, companies like Altium, before its acquisition, acted as picks-and-shovels to electronics design, selling indispensable software tools to engineers building everything from consumer gadgets to industrial systems.

Data-centre and digital infrastructure plays also fit the picks and shovels framework. NextDC (ASX:NXT) is a clean example: it benefits from cloud adoption, AI workloads, and enterprise digitisation without needing to pick winning software platforms. As long as compute demand grows, neutral data-centre operators collect rent. That is very much a modern “shovels to the AI gold rush” business, though valuation discipline matters.

Conclusion

Overall, the evidence suggests that the picks-and-shovels argument is conditionally true, not a rule. It tends to work when suppliers sell mission-critical inputs, benefit from recurring demand, have pricing power or switching costs, and avoid capital intensity and commoditization. It fails when suppliers are exposed to discretionary spending, intense competition, or technological leapfrogging. In mining, it has historically been more reliable than in tech due to slower technological change and persistent operational needs. In technology, it can be highly effective early in a cycle but dangerous when valuations assume permanent scarcity or dominance.

The key takeaway for equity market investors is that picks and shovels reduce one type of risk—choosing the wrong winner—but introduce others, particularly valuation risk and cycle timing. They are best viewed not as a shortcut to certainty, but as a framework for analysing where durable economics are likely to sit within a rapidly growing ecosystem.