What makes a stock a good holding? Is it an affordable price tag? A sustainable, growing dividend? A brand value that's second to none? These are the essential questions that beginning investors -- as well as seasoned ones -- need to consider.
In my view, what makes a stock a good holding is that the company behind the stock is "antifragile." In fact, the 10 most antifragile stocks under a system I've used over the past five years averaged nearly a triple in 2020.
But what does "antifragile" mean? And how can you apply it going forward?
Image source: Getty Images.
What makes them antifragile?
The word was coined by best-selling author and former trader Nassim Taleb. He contends that we often group everything in the world into two groups: the fragile (things that break easily under stress) and the resilient/robust (things that don't break under stress).
But, Taleb argues, this ignores a third and critically important group: the antifragile. This refers to things that actually get stronger when exposed to stress. For an everyday example, think about your muscles: The right amount of stress (lifting weights) causes them to regrow even stronger.
Applying this to stocks, an antifragile company would have three key traits:
- Barbell strategy: A mission-driven company should devote 80% of its resources to low-risk (high-moat) business and another 20% to high-risk, high-reward (optionality) lines of business.
- Financial fortitude: These companies have lots of customers (no concentration risk) and have the type of balance sheet that can help them survive and thrive in tough times.
- Skin in the game: Founder-led businesses where insiders own lots of the stock and employees are happy to be there align the interests of key people with shareholders.
The idea is simple: When these three factors are present, the companies are likely to continue thriving in an unknown future. First, I'll show you the 10 companies in question, and then, we'll look at why they made the cut.
The 10 companies
The 10 companies, with their 2020 returns below, are:
Barbell strategy
Evaluating a company's barbell strategy is broken into three components:
- Mission driven: The company's mission statement should be simple, inspiring, and optional.
- Moat: The company's core business should be protected by sustainable competitive advantages, or moats.
- Optionality: The company has multiple ways to fulfill its mission.
All 10 companies have impressive moats.
| Company | Mission Statement | Moats | Evidence of Optionality |
|---|---|---|---|
| Amazon | "To be earth's most customer-centric company." |
|
In perhaps the greatest example of optionality, Amazon will do anything where it can sustainably improve the customer experience. |
| Alphabet (Google) | "To organize the world's information and make it universally accessible and useful." |
|
The company's "Other Bets" could one day supplement ad revenue. |
| "To build community and bring the world closer together." |
|
What started as a single website has morphed to include (for now) Instagram, Messenger, and WhatsApp. | |
| MercadoLibre | "To democratize commerce and finance in Latin America." |
|
Mercado Pago and Mercado Envios show there's lots of optionality. |
| Shopify | "To make commerce better for everyone." |
|
Merchant services and a fulfillment network are clear signs of optionality. |
| CrowdStrike | "To prevent breaches." |
|
The company went public last year with 10 modules and now has 17. |
| Atlassian | "To help unleash the potential of every team." |
|
What started as a single solution (Jira) is now a huge suite. |
| Sea Limited | "To better the lives of consumers and small businesses through technology." |
|
Perhaps second only to Amazon, this gaming/e-commerce/payment company is emblematic of optionality. |
| Axon Enterprise | "To protect life." |
|
What was once just a manufacturer has turned into a SaaS player. |
| Zoom Video | "To make video communications frictionless and secure." |
|
The company is coming out with new offerings every month. |
Data source: Company resources for mission statements.
Some companies, like Amazon, have demonstrated incredible use of the barbell method over the past 10 years. Everything the company has done, for instance, has been aimed at providing the best customer service imaginable. Others, like Zoom, are just getting started on that journey, but Zoom has already demonstrated it can benefit from "shocks" to its system.
Financial antifragility
Financial antifragility is also important. The best mission statement and barbell strategy in the world won't make a difference if a company doesn't have enough cash to stay in business.
Companies that have lots of cash, little debt, and positive free cash flows can actually benefit from economic distress. How? By buying back their own shares, acquiring rivals, or simply pricing the competition out of the market.
It's also best when a company doesn't rely on just a few customers to provide a bulk of sales. If that were the case, a single decision by a single person could, with one stroke of the pen, quickly change the outlook for a company.
| Company | Cash / Debt | Free Cash Flow | Customer Concentration? |
|---|---|---|---|
| Amazon | $68 billion / $33 billion |
$27 billion |
No |
| Alphabet (Google) | $147 billion / $14 billion |
$31 billion |
No |
| $55 billion / $0 |
$23 billion |
No | |
| MercadoLibre | $3,300 million / $613 million |
$314 million |
No |
| Shopify | $6,300 million / $750 million |
$48 million |
No |
| CrowdStrike | $1,100 million / $0 |
$245 million |
No |
| Atlassian | $2,400 million / $0 |
$528 million |
No |
| Sea Limited | $3.8 billion / $1.9 billion |
N/A |
No |
| Axon Enterprise | $628 million / $0 |
($20 million) |
No |
| Zoom Video | $1.9 billion / $0 |
$1.0 billion |
No |
Data source: Yahoo! Finance, SEC filings. Free cash flow presented on trailing-12-month basis.
Yes, there are some outliers. Axon Enterprise, for instance, has decided to spend more cash than it takes in right now to build out new tools for police departments. That trade-off's reasonable.
Others, like Shopify, proved how important that extra cash is: The company provided relief for merchants in the form of loans to help them weather the COVID-19 storm. That not only helped Shopify's core business but earned enormous goodwill from the entrepreneurs who power Shopify.
Skin in the game
Finally, companies should have lots of skin in the game. That means that those running the company have the same financial incentive to see it do well that shareholders do.
Founders often view their companies as existential outgrowths of themselves. Therefore, when the person who started a company still runs it, the scales are tipped in investors' favor.
It's also a good sign when executives (insiders) own shares and (via reviews on Glassdoor) that everyday employees enjoy working at the company.
| Company | Role of Founder | Insider Voting Power | Glassdoor Rating |
|---|---|---|---|
| Amazon | Jeff Bezos, CEO |
15.1% |
3.9 |
| Alphabet (Google) | Larry Page & Sergey Brin, Board of Directors |
52.8% |
4.5 |
| Mark Zuckerberg, CEO |
57.9% |
4.5 | |
| MercadoLibre | Marcos Galperin, CEO |
8.1% |
4.4 |
| Shopify | Tobi Lutke, CEO |
51.8% |
4.2 |
| CrowdStrike | George Kurtz, CEO |
29.4% |
4.0 |
| Atlassian | Mark Cannon-Brookes & Scott Farquhar, co-CEOs |
89.8% |
4.6 |
| Sea Limited | Forrest Li, CEO |
45.7% |
4.0* |
| Axon Enterprise | Patrick Smith, CEO |
1.9% |
3.4 |
| Zoom Video | Eric Yuan, CEO |
51.8% |
4.7 |
Data source: SEC filings; all voting power from most recent proxy statement or annual report. *Is an average between Shopee and Garena.
Again, none of this is a silver bullet. You can have founders involved, insiders heavily invested, and happy employees and still have a bad investment.
A simple takeaway
No investing framework is perfect. After such great performance in 2020, I wouldn't be surprised to see these stocks perform below the market for a while. That's OK; investing is a game to be played over decades, not a few years.
For now, searching for other companies that share these traits is my highest priority. It wouldn't hurt for you to do the same.
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