The Asset-Light Portfolio That Beats The S&P 500

by: Mike Berner

We have transitioned into an asset-light economy dominated by technology-enabled platform companies.

Here, I construct a portfolio comprised of forty asset-light compounders.

Over the last five years, returns from this hypothetical portfolio would have handily beaten the S&P 500.

Several weeks ago I published "Buffett and 'Asset Light' Investing," which examines a proclamation that the Oracle of Omaha issued at Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) annual meeting in 2018: we have transitioned into an asset-light economy dominated by technology-enabled platform companies.

This contrasts sharply with the latter half of the 20th century, where growth-oriented investing centered around buying branded consumer products companies and asset-heavy commodity producers at a reasonable price. The value investing principles have not changed, but the context is totally different.

Here, I construct a portfolio comprised of forty asset-light compounders. Some names, like Amazon (AMZN) and Facebook (FB), are high-profile examples that often come to mind when we think about 'tech' companies. Others, such as Copart (CPRT) (a salvage vehicle auctioneer) and Align Technology (ALGN) (dental devices), do not fit into the traditional Silicon Valley mold. All, however, fall under the umbrella of technology-enabled service provider or platform companies.

Collectively, this basket of stocks would have handily crushed the broader market over the last five years. The Asset Light Portfolio shows an 18.4 percent CAGR, while the S&P 500 returned 8.6 percent annually. A $1,000 investment in each of the 34 companies that were publicly listed in March 2014 would have grown to $79,000, while a $34,000 investment in an S&P 500 index fund would be worth $51,000 (before fees).

Note that some of the best performers are not household names. While Amazon shot up 368 percent over the last five years, Fair Isaac (FICO) - the somewhat boring credit scorer - leads with a 377 percent increase. Other top performers include medical device companies Align Technology and Intuitive Surgical (ISRG). There is much to the tech world beyond FANG.

Over the long run, I expect the Asset Light Portfolio to outperform the S&P 500. Right now, though, it looks like an expensive proposition. The average price-to-earnings ratio of the group stands at 54, with a median of 46 times earnings (excluding stocks with an infinite P/E). These companies enjoy the luxury of a booming economy and easy money, but that could vanish in an instant.

A few names still look relatively inexpensive. In the table above, stocks with a P/E of 30 or below appear in bold. Some of these I have written about before, such as Copart and Facebook, which sell for a P/E of 30 and 22, respectively. Apple (AAPL) arguably could be included on this list as well. A favorite of Buffett, the iPhone maker and App Store owner remains at 15 times earnings.

Of the forty names, only ten have underperformed the S&P 500 index since 2014. Four show negative returns. Most of these stinkers live in particularly competitive fields like social media, travel booking, and online reviews. It goes without saying that no investing strategy can succeed 100 percent of the time.

Even though many of these stocks would not pass value investing muster due to price, I find it sensible to comprise a list of names that could be picked up during a downturn. Going forward, I will monitor this hypothetical portfolio in the hope that some valuations will fall low enough to become part of my actual portfolio.

Disclosure: I am/we are long CPRT, MTCH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.