A Golden Portfolio with 5 Pick-and-Shovel Stocks
Mark Twain wrote of the California Gold Rush, "When everyone is looking for gold, it's a good time to be in the pick and shovel business." This lesson can be applied to the modern stock market. If you'd like to play promising trends by investing in supplies, rather than digging for gold, American Railcar Industries , Inter Parfums , Deere , International Game Technology , and Oil States International provide a diversified portfolio of stable yet growing suppliers.
A slick oil play
Unconventional oil and gas in America is like a latter-day Gold Rush, with the Permian Basin alone expected to hold a century's output of oil worth $100 billion. Other U.S. shale basins are experiencing such demand that accommodations are hard to find for new workers hired every day. Mid cap Oil States International benefits from both of these trends.
Oil States International is a global specialty service and products supplier to oil and gas drillers and producers, but it also has exposure to every U.S. shale basin. The Motley Fool's online CAPS community gives it a five-star rating (out of five), and it has a trailing price-to-earnings ratio of 15.8. As a global supplier, it has less geopolitical risk than the exploration and production companies it supplies.
The company has enjoyed three-year earnings-per-share and revenue growth of 35.6% and 24.67%, respectively. Gross margin of 25.2% and net profit margin of 8.8% are both higher than the company's five-year averages.
At the Ira Sohn Conference in May, Greenlight Capital's David Einhorn gave the company a sum-of-parts price target of $120 at 8.6 times the company's 2013 EBITD. He liked that half the fleet was proprietary and patent-protected. Meanwhile, Forbes conjectured its legacy offshore segment could sell at a premium.
Einhorn said the accommodations (i.e., workforce housing) division was undervalued and should be spun off -- and the company is doing just that by next summer. The business segment will be structured as a real-estate investment trust, or REIT. So shareholders will get not only the oil and gas business, but also a tax-fee distribution of the REIT.
Riding the rails to profits
American Railcar Industries designs, manufactures, and sells tank and hopper railcars that carry everything from grains and chemicals to petroleum products. It operates as a subsidiary of Icahn Enterprises.
The rails have been a hot space these last few years as a cheaper way to move commodities, especially oil. Warren Buffett must agree, having bought Burlington Northern a few years ago.
This small-cap has a yield of 2.4% at a 20% payout ratio with a P/E of 10.55. American Railcar has more exposure to in-demand oil and less exposure to declining coal than rival FreightCar America. American Railcar also made the 2013 Forbes 100 "Most Trustworthy" list, earning an excellent governance risk score of 92.
With a railcar leasing and finance arm, as well as a solid business in the manufacturing, repair, and servicing of railcars, American Railcar should continue outperforming. Fellow fool Rupert Hargreaves explains the success of its leasing arm, noting a first-half surge of 250% in lease income.
Deere to my heart
Don't want to buy volatile fertilizer commodity stocks but still believe in the global agriculture boom? Consider big-cap farm-equipment manufacturer and dividend aristocrat Deere & Co. The company has raised its dividend for 31 years straight. The yield is now 2.5%, with a three-year dividend growth rate of 17.8%.
Its trailing earnings multiple of 9.5 is at the lower end of its five-year historical average. Gross margin of 29.2% and net profit margin of 9.5% are higher than both its own historical averages and the industry averages.
This global company will also benefit from a housing recovery with its construction and forestry segments. It is already on track for this year to beat its 2012 total revenue of $34.18 billion and earnings of $7.73 per share.
The sweet smell of success
Small cap Inter Parfums develops, manufactures, and markets prestige and specialty fragrances.The five-star CAPS-rated stock has almost doubled in the last year, yet it trades at a low trailing earnings multiple of 6.75 with a 1.6% yield.
The fragrance market worldwide is estimated to be worth $27 billion and growing, and Inter Parfums is a safer way to play it than trying to pick the company that will launch that one blockbuster fragrance. Inter Parfums has only 312 employees, yet it develops some of the most famous fragrances. Since 2009, the company boasts a 23.3% net sales compound annual growth rate and a stunning three-year EPS growth rate of 74.39%.
Designers and retailers want their own high-margin fragrance cash cows, and Inter Parfums supplies them. NPD Group reported that in the first quarter of 2013, women's fragrances priced above $100 enjoyed 40% sales growth. Inter Parfum's gross margin of 63% and net profit margin of 29.20% are representative of the high markup in fragrance.
A surer thing than casinos
"Sin" stocks are intriguing, but casinos like Wynn Resorts and Las Vegas Sands can be so volatile, hit by any downturn in monthly gaming numbers in Macau (the Chinese gaming mecca) as well as threats from mainland government intervention. Casinos also have headline risk, such as periodic allegations of violations of the Foreign Corrupt Practices Act. To profit from this popular vice, consider instead the mid-cap market-leader in gaming equipment, International Game Technology.
It offers a yield of 2.2% and trades at a trailing earnings multiple of 16.75 with a net profit margin of 12.7%
The company not only makes the machines on casino floors, but is also involved in the online social and mobile gaming space. It owns the largest online casino in the world, Double Down, a 2012 acquisition that's expected to be a strong growth-driver going forward.
"Pick and shovel" still works
In the 21st century, you don't have to strike gold to make money. The pick-and-shovel strategy works to create a strong portfolio diversified by both market caps and industries, each with compelling growth catalysts ahead.
Want to Retire Wealthy?
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
The article A Golden Portfolio with 5 Pick-and-Shovel Stocks originally appeared on Fool.com.AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.