Investing in the stock market is an excellent way to build long-term wealth. However, there's a misconception that investing in the next big thing is the only way to generate that wealth. Buy veteran investors know you can also dig a little deeper and find quality companies with smart business plans in places you may not expect to find them.
For instance, there is an insurance stock many may not know of that has returned 392% since it went public in 2018. This stellar stock performance rivals that of Apple while outpacing Amazon, Microsoft, and Alphabet over the same period. Best of all, this company has lots of room left for growth over the next decade and beyond.
Read on to learn more about the stock, its growth story, and whether it's suitable for your portfolio.
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Goosehead Insurance has delivered for customers and investors
As long-term investors, your job is to put your hard-earned cash to work in high-quality assets so that it can grow over time. One company that has delivered excellent long-term returns for investors is Goosehead Insurance (GSHD -1.80%). Since Goosehead went public in April 2018, the stock has crushed it. Its nearly 33% annualized returns since that time well outpace the S&P 500, which returned almost 12% annually in the same period.
GSHD Total Return Level data by YCharts
Goosehead founded on frustration over insurance agents
Founded in 2003, Goosehead is an insurance agency connecting individuals with insurance companies for things like life, property, and automotive insurance. The company doesn't write policies; instead, it connects prospective customers with companies that do, helping them find the right policies at the right price.
Robyn Jones, who grew frustrated with dealing with insurance agents as she looked to build her real estate company flipping houses, co-founded Goosehead with her husband and current CEO, Mark Jones. Robyn took a customer-focused approach to the business, and the business took off early on. The business was doing so well that Mark Jones, who had a lucrative job at management consulting firm Bain Capital, quit and joined the company in 2004.
Goosehead took its customer-centric approach to insurance sales and built it up into a sizable company over the next decade. Then, in 2012, it took another huge step forward when it introduced a franchise-based model that would allow insurance agents to leverage their expertise and platform to sell policies.
The secret sauce to Goosehead's success is its franchise-based model
Franchise-based business models have been around for a while and appeal to entrepreneurs because they can leverage a company's strong brand and knowledge base to grow quickly. Franchising has been a key pillar of Goosehead's long-term growth. In 2015, the company had 125 operating franchises. That figure has ballooned to over 1,413, with another 700 franchises in the pipeline.
Those franchises have been essential to Goosehead's growth over the years. In 2017, Goosehead wrote $342 million in premiums, with 58% coming from its franchise channel. Last year, it wrote $2.2 billion in premiums, with 75% of that coming from its franchisees.
Chart by author.
Goosehead's franchise-based business has helped it achieve solid growth and should contribute to accelerated growth going forward because of how its profit-sharing agreements are structured. When Goosehead brings on a new franchise, it earns initial franchise fees and royalty fees that equal 20% for new signups. As thriving franchises renew agreements, its share of royalties increases to 50%, giving Goosehead an excellent opportunity to achieve long-term growth from its top performers while expanding its margins.
Goosehead stock trades at a premium valuation and reflects strong growth prospects
Goosehead achieved impressive growth, and as a result, it comes with an expensive price tag. The stock currently trades at 6.9 times sales and 55 times forward earnings. However, the lofty valuation may be justified. As franchisees renew, Goosehead's income should continue to grow along with its margins.
Not only that, but Wall Street sees its stellar growth continuing over the coming years. Analysts on Wall Street project that Goosehead's revenue and net income will grow 65% and 242% over the next two years (through 2025), a growth rate that far outpaces competitors, and that is why the stock trades at such a premium.
Goosehead Insurance may not be an exciting company, but its stellar growth, solid investment returns, and future growth prospects make it an excellent stock worthy of a spot in your diversified portfolio.
