June Standout: Goosehead Insurance (GSHD)

Updated: Dec 3, 2021

Each month we'll be highlighting our top performing holding for our clients. A month of performance is obviously a very short time period but we'll dive into the stock and what they're doing and maybe why they're performing so well.

Goosehead Insurance, Inc. provides personal lines insurance agency services in the United States. The company operates in two segments, Corporate Channel and Franchise Channel. It offers homeowner's, automotive, dwelling property, flood, wind, earthquake, excess liability or umbrella, motorcycle, recreational vehicle, general liability, property, and life insurance products and services. As of December 31, 2020, the company had 1,468 total franchises. Goosehead Insurance, Inc. was founded in 2003 and is headquartered in Westlake, Texas.

Goosehead (GSHD) had a wonderful June returning over 40%. Granted, the stock had retreated over 50% from the high it set in February - so this move to the upside still hasn't recovered all those losses. The move higher happened for no particular reason, very much like the move lower earlier this year. There has been some insider selling (we prefer to see buying instead of selling) but nothing glaring by any means.

Goosehead has a powerful business model that is growing stronger by the day. They are disrupting the insurance agent market by leveraging local insurance salesmen and saleswomen. Instead of trying to get rid of the local insurer (like some other fintech companies), Goosehead is recruiting those insurance agents into their franchise. Goosehead then provides them the technological and administrative support they need while allowing them to remain independent. By leveraging the technology Gooshead provides, independent agents can compete with direct-sales giants.

The stock has always traded at a premium but that is what tends to happen when you're growing earnings at 50% a year. This is a big market, and difficult, but Goosehead has plenty of room to take market share from the big players with revenue of only $117 million last year.

The big reason for their success is the satisfaction of the agents who have signed on with Goosehead. They are making insurance more profitable for the agents. Instead of an agent writing insurance for State Farm or Allstate these agents can now access over 100 insurance providers allowing them to offer more options to their clients. This will allow the agent to do what's best for the client and service them at a higher level. It also allows the agent to leverage the Goosehead system to handle renewals, claims, simple customer service calls, and more - which allows the agent to focus on finding new clients.

It probably doesn't work for everyone but the model is obviously a good one because agents are flocking to Goosehead. And it does make sense. It's very much like our relationship with Charles Schwab. We leverage the Charles Schwab platform to provide our clients with the best possible investments. We are not tied to sell Schwab funds, Fidelity funds, annuities from New York Life with high fees, or a CD from your local bank. We can act independent - TRULY INDEPENDENT. When you work directly for State Farm or directly for XYZ bank - you might only have access to their products or incentive to sell their products.

This is why the Goosehead model is gaining so much traction the same way the Independent Investment Advisor model gained so much traction. You're doing what's best for the client (hopefully) while still providing them access to the best products out there.

They wrote about $1 billion in premiums last year which is less than 1% of the independent insurance agent market. They would have to grow 20x to catch up with Farmers and 60x to catch up with State Farm. Maybe they never get that big, but I know I rather be invested in Goosehead at this point than State Farm (who should be definitely looking over their shoulder). The franchise count for Goosehead has doubled in the last two years.

The stock isn't without risk though. GSHD has had a handful of price corrections well above 25% (the most recent being 50%) but if you can hold through the ups and downs you may be rewarded.