One of my favorite investment strategies is the “picking and shoveling” approach. If you’re a long-time reader of my work, I’m sure you’ve seen me talk about this before, but for those who don’t know, “pick and shovel” refers to various gold rush times in America. Thousands of people flocked to places where gold was found. Some of the prospectors achieved great success, but most did not. But winners and losers all bought the equipment they needed to search for the yellow metal: picks, shovels and pans. From an investment perspective, if you invested in individual prospectors you might get lucky and find one of the small percentage making gold, but the real, consistent money was made by those who provided picks and shovels, making them a much better investment. .

From an energy perspective, the most obvious pick and shovel stocks are oilfield service companies; the Haliburtons (HAL) and Schlumbergers (SLB) that we all know and love. But the problem is that their fortunes are ebbing away along with the willingness of big oil companies to invest in the future. However, there is also a sub-supplier that is completely in the pick and shovel game but is much less affected by changes in oil prices. But what makes this stock really attractive is that all the numbers point to it being undervalued.

DNOW (DNOW) is a Houston, TX based company that provides nearly every aspect of downstream operation,…

One of my favorite investment strategies is the “picking and shoveling” approach. If you’re a long-time reader of my work, I’m sure you’ve seen me talk about this before, but for those who don’t know, “pick and shovel” refers to various gold rush times in America. Thousands of people flocked to places where gold was found. Some of the prospectors achieved great success, but most did not. But winners and losers all bought the equipment they needed to search for the yellow metal: picks, shovels and pans. From an investment perspective, if you invested in individual prospectors you might get lucky and find one of the small percentage making gold, but the real, consistent money was made by those who provided picks and shovels, making them a much better investment. .

From an energy perspective, the most obvious pick and shovel stocks are oilfield service companies; the Haliburtons (HAL) and Schlumbergers (SLB) that we all know and love. But the problem is that their fortunes are ebbing away along with the willingness of big oil companies to invest in the future. However, there is also a sub-supplier that is completely in the pick and shovel game but is much less affected by changes in oil prices. But what makes this stock really attractive is that all the numbers point to it being undervalued.

DNOW (DNOW) is a Houston, TX-based company that provides virtually every aspect of downstream operations, from pipes, gaskets and flanges to safety supplies and personal protection equipment, to supply chain and inventory management systems. They’re not a large company, with a market cap of just over $1.2 billion, but they still have a strong balance sheet. Free cash flow of over $76 million, cash on hand of $197 million and total debt of $64 million, and a current ratio well above 2 indicate financial soundness.

A P/E ratio below 6, a price/sales ratio of 0.55, and a price/book ratio around 1 indicate value here, but as always, there are reasons for these numbers. In this case, it performs poorly this year. 2024 revenues and earnings per share appear to be showing losses compared to last year, so lower valuation metrics make sense. This looks set to change soon.

In March of this year, DNOW completed its all-cash acquisition of Whitco Supply Company; This will increase its presence in the mid-market supply business and complement its existing strong presence in the downstream market. The benefits of this acquisition will begin to be seen once this year ends; That’s why Wall Street analysts who follow DNOW are predicting a return to growth next year, even if it’s likely only around 3.5%. The deal was announced in February and was well received by traders and investors at the time, as the chart above clearly shows.

Assuming the benefits of the Whitco deal show up and show up in DNOW’s numbers, now is a great time to buy the stock, given that the company will report third-quarter earnings on November 4.^he. I’m usually someone who prefers to wait until after earnings to buy stocks, but in this case I’ll make an exception. Expectations are for earnings per share of $0.21 on revenue of approximately $615 million; But the possibility of a Whitco effect and the fact that DNOW has beaten earnings expectations in three of the last four quarters make the possibility of these numbers being exceeded distinct.

As a result, DNOW is a supplier to a relatively stable segment of the oil and gas industry, benefiting whichever oil company becomes successful. The company has a solid balance sheet, good valuation metrics, and reason to believe the recent crash is about to reverse. Adding all this up, it looks like a profitable purchase to me.