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?

Drawing of arrows pointing up and to the right.

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:

AMZN Chart

AMZN data by YCharts

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.”
  • Brand value
  • Low-cost production (shipping)
  • Network effects (marketplace)
  • High switching costs (AWS)
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.”
  • Brand value
  • Low-cost production (data)
The company’s “Other Bets” could one day supplement ad revenue.
Facebook “To build community and bring the world closer together.”
  • Brand value
  • Network effects
  • Low-cost production (data)
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.”
  • Brand value
  • Network effects (marketplace)
  • Low-cost production (shipping)
  • High switching costs (payments)
Mercado Pago and Mercado Envios show there’s lots of optionality.
Shopify “To make commerce better for everyone.”
  • High switching costs
  • Network effects (third-party apps)
Merchant services and a fulfillment network are clear signs of optionality.
CrowdStrike “To prevent breaches.”
  • Network effects
  • High switching costs
The company went public last year with 10 modules and now has 17.
Atlassian “To help unleash the potential of every team.”
  • Internal network effects
  • High switching costs
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.”
  • Brand value (gaming)
  • Network effects (e-commerce)
  • High switching costs (Sea Money)
  • Low-cost production (shipping)
Perhaps second only to Amazon, this gaming/e-commerce/payment company is emblematic of optionality.
Axon Enterprise “To protect life.”
  • Brand (Tasers)
  • High switching costs (Evidence.com)
What was once just a manufacturer has turned into a SaaS player.
Zoom Video “To make video communications frictionless and secure.”
  • Brand value
  • Internal network effects
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
Facebook $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
Facebook 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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