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Goosehead Insurance Inc. (GSHD) Is Good Small-Cap Investment Opportunity

M.Nadeem
·4 min read

Goosehead Insurance Inc. (NASDAQ:GSHD) is good investment opportunity and the company's stock price is expected to see a strong surge in future years, according to a bullish thesis that I found on Reddit. According to the thesis by a user smallcapconnoisseur, GSHD may be close to fairly valued or slightly undervalued.

GSHD's main strength is its customer service and investments in its team and technologies, according to the thesis. The P/E ratio is high but justifiable given past and likely future growth and the company has a strong management team focused on growth and investments in technology, according to the thesis.

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GSHD has been showing a strong performance on the stock market this year so far, with the share price increasing over 141% since the start of this year. The company went public on April 27, 2018. Since then, their share price has climbed from an opening $12 to a high of $115.11 - currently treading at around $106.

Since going public, Goosehead has had positive free cash flow and has been able to invest for sustainable growth. Major investments have been made into their team and technology for a competitive edge. Seeing as they will be competing with major brands like Geico, Progressive, and State Farm, they will need a major edge to continue their growth.

GSHD's future growth rests in its customer service. Its business is structured so that franchisees focus on selling and selling only. The company maintains a strong 4.1/5 rating with State Farm the next closest at 3.8/5. Talking about the future growth, the thesis states:

Like many small cap stocks, Goosehead may look overvalued by certain metrics. As of September 2020, it maintains a P/E ratio of 224. This is significantly higher than many investors would hope for. It’s important to remember, though, that as a small cap stock described as an “emerging growth company,” this valuation is heavily focused on future growth. Year over year growth from CY 2018 to CY 2019, Gooshead had a 26.32% growth rate in Contingency and Agency Fees and a 32.5% growth rate in its Franchise Revenues segment.

GSHD is also investing in technology and teams. While its primary revenue sources are meant to come from premiums written by their franchises and the franchise fee, the company focuses heavily on its corporate teams. The company reported a growth rate of about 46% in its G&A expenses from 2018 to 2019. It also focused on technology such as data analytics and predictive analytics. It claims that it can use predictive analytics features to find out customers who are most likely to be looking for new service.

The thesis, using a large discount rate of 15%, values GSHD slightly above its current value but with a large growth in free cash flows. This leads to a solid expected growth rate of 11.44%.

Meanwhile, I saw very interesting comments on this thesis. One user asked a question about the possible threats for GSHD.

What are the possible threats for the company? They have some big dog competitors, are they able to mimick their edge thanks to their bigger funds? Could the competition price them out of the market thanks to scale advantages?

Another user asked about their combined ratio to find out if it is actually making money from their insurance operations.

You’re valuing an insurance company, and if I’m not mistaken, you didn’t bring up their combined ratio, which would tell us if they’re actually making money from their insurance operations.

Keep in mine, they’re going up against one of Berkshire Hathaway's core holdings, GEICO, which has a solid combined ratio, decades in business, one of the best reparations, and no questions about their ability to pay claims.

Now look at what hedge funds are thinking about GSHD. Our database shows that the stock was in 11 funds' portfolios at the end of March, compared to nine funds with GSHD holdings at the end of the previous quarter. However, GSHD isn't among the 30 most popular stocks among hedge funds.

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Disclosure: None. This article is originally published at Insider Monkey.