Making money by selling picks, shovels and blue jeans.

23 November, 2009 (19:23) | Uncategorized | By: Tony Crowell

The California Gold Rush of 1949 brought riches to some although the odds were better for those who were supplying the miners. Historians estimate that only one in twenty miners left the goldfields with more money than his original stake. Those who did strike gold started a boom economy that brought financial success to those who supplied them.

Their need for supplies led to the familiar observation that the better business is to sell miners picks, shovels and blue jeans rather than take the longer odds of striking it rich. That’s sensible although I haven’t found any history of riches from selling picks and shovels and suspect the Forty-NIners brought tools with them. They did need pants, although Levi Strauss actually did not arrive until 1853 and the pocket stitches and riveted seams that made his pants into “Levis” didn’t come until 1873.

His success shows the need for readiness to innovation. Another aspect of business success comes from recognizing competition. In the Klondike, there were over 250 steamboat operators but no record of any lasting commercial success. History reveals a successful mule packer, a reminder of success from less glamorous businesses like that of Waste Management (WM-$32).

The Idaho gold country produced a successful speculator with the improbably coincidental name of Bill Gates. Not being blessed with financial advice from sources like this piece, he died in Peru, having spent his fortune on mining claims and young women.

With the world’s population estimated to grow 40% in 40 years, the demand for energy and food will be like an orderly gold rush. Energy is still dominated by oil and oil by the big multinational oil companies. Somewhat like the forty-niners, they dig holes in the earth’s crust and sell what they find. The biggest are stable, decent dividend producers but with earnings still subject to oil prices.

Selling them the equivalent of picks and shovels has produced enough demand to create the oil service sector. Schlumberger (SLB-$65) is the blue chip technological leader with sales of $24 billion, growing at over 20% annually. Founded in 1912 in France to apply newly developed radio wave technology to oil exploration, it has principal offices in Paris, Houston and The Hague. It operates in 80 countries and spent over $800 million last year in research and development. SLB’s stock price is usually valued more richly than others in its sector but its steady record supports this. Its yield is 1.3% with periodic dividend increases.

FMC Technologies (FMC-$52), smaller with $4.5 billion sales, focuses more on production technologies and underwater operations. It recently raised its 2009 earnings estimate to $2.88 a share, a Price: Earnings ratio of 18. Flowserve (FLS-$103) also assists oil companies, primarily with fluid handling systems. Core Labs (CLB-$126), the smallest of these four companies, offers technologies that enable producers to analyze, measure and optimize the output from energy reservoirs.

Farmers also have a sector focused on them. Monsanto (MON-$80) is the technological leader with $12 billion in sales. Its earnings dipped with disappointing sales of traditional chemicals like insecticides but its future lies in genetically modified (“GM”) seeds. These have aroused consumer opposition, especially in Europe, but its non-food GM seeds like cotton are selling well. These can be linked to its proprietary insecticides resulting in more sales gains. The company has announced a ten-year goal of doubling crop yields from GM corn, soybean, cotton and canola.

Monsanto also recently reaffirmed its goal to double 2007 earnings by 2012. Despite the hiccup this year as farmers drew back, it remains on course. Swiss-based Syngenta (SYT-$53) with $11 billion sales is also steadily building earnings and share price by supplying the modern miners of food. Selling picks and shovels can be quite profitable.

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