Goldman Sachs recently introduced two new stock baskets based on corporate asset intensity, a metric that measures the ratio of assets to revenues. The firm’s strategy has focused on identifying lean companies with low asset intensity ratios, which have shown strong growth and outperformance in the market. In contrast, asset-heavy companies with higher asset intensity ratios have lagged behind in terms of returns.
By back-testing the asset-light and asset-heavy baskets, Goldman found that the asset-light cohort has outperformed the high-asset intensity group by a significant margin over the past 20 years. The superior return on equity of the lean stocks (22% vs. 15%) has contributed to this long-term outperformance. Additionally, the decreasing trend in capital expenditures within the S & P 500 has favored asset-light companies, as they require fewer assets to generate strong returns.
Some of the lean stocks identified by Goldman include semiconductor giant Nvidia, chipmaker Broadcom, online dating platform operator Match Group, and live entertainment company Live Nation. These companies have low asset intensity ratios and have shown varying levels of performance in the market.
Nvidia, with an asset intensity ratio of 0.5, has delivered impressive year-to-date returns and has a strong growth outlook. Analysts remain bullish on the stock, despite reaching peak price targets. Broadcom, with an asset intensity ratio of 0.3, has also shown positive growth and analyst sentiment but may be due for a minor pullback according to average price targets.
Match Group, an asset-light company in the online dating industry, has faced some challenges in 2024 but is expected to rally based on analyst predictions. Live Nation, a lean company in the entertainment sector, has consistently outperformed and is projected to continue its upward trend.
On the other hand, asset-heavy companies like Micron Technology, Intel, and On Semiconductor, as well as telecommunication giants AT&T, Verizon, and T-Mobile, have been featured in the S & P 500. These companies have higher asset intensity ratios and may face challenges in achieving the same level of growth and performance as their lean counterparts.
Goldman Sachs’ innovative approach to stock selection based on asset intensity ratios has proven to be successful in identifying high-performing companies with strong growth potential. By focusing on lean companies with low asset intensity, investors can potentially outperform the market and achieve superior returns over the long term. It will be interesting to see how these asset-light stocks continue to perform and whether asset-heavy companies can adapt to changing market dynamics to remain competitive.
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