It is always very illuminating to see what stocks Akre Capital Management has been buying in their latest 13F reports. The firm is known for picking compounding machines, which are stocks that compound shareholder capital consistently over long periods of time.
The founder, Chuck Akre (Trades, Portfolio), describes the firm's investment approach as a three legged stool. This metaphoric three legged stool describes what the firm looks for in an investment: 1) extraordinary business, 2) talented management and 3) great reinvestment opportunities and histories. Akre Capital Management typically holds its investments over long periods of time and only sells if it feels that one of the legs of the metaphorical three legged stool is injured or broken.
The following chart shows the GuruFocus heat map of Akre Capital Management's holdings. As we can see, most of the firm's picks are large-cap, well-known compounders.
What I find most interesting is when the firm's portfolio management team picks a relatively unknown or small company which has not yet risen to fame. One such stock that I noticed the firm has been buying is Goosehead Insurance Inc. (GSHD, Financial).
Goosehead is a fairly small company with a market cap of ~$1 billion, much smaller than the typical large cap companies Akre Capital Management holds. In fact, the firm has been buying this stock for a while, starting in the fourth quarter of 2018 and building up its position. The stock peaked in the fourth quarter of 2021 and has come down significantly. Nevertheless, Akre Capital Management has bought more Goosehead stock in the second quarter of 2022, adding another 18.45% of the stock to its portfolio at an average price of $54.95.
About Goosehead
Gooseheads Insurance operates as an insurance agency in the U.S. It sells insurance products such as homeowner's insurance, auto insurance, personal line products (including flood, wind and earthquake insurance), excess liability or umbrella insurance, specialty lines (such as motorcycle, recreational vehicle and other insurance), commercial lines (general liability, property and auto insurance for small businesses) and life insurance. Its operating segments are the Corporate Channel and the Franchise Channel.
Goosehead is not an insurance company as the name suggests but rather an agency/broker, i.e., it matches the insured with an underwriter. It does not bear any underwriting risk. It collect a fee for service. Goosehead represents over 140 insurance companies that underwrite personal lines and small commercial lines risks, and its operations include a network of nine corporate sales offices and over 1,400 operating and contracted franchises. The company is controlled by its founders Mark and Robyn Jones, who own about 46% of the stock.
Goosehead's business has grown rapidly over the last 10 years. The company achieved revenue growth of 29% in 2021 and total written premium growth of 45% in 2021. As of Dec. 31, 2021, its 10-year total written premium CAGR was 40% and its five-year premium CAGR was 45%.
Source: Goosehead investor materials
Goosehead's stock rose rapidly over the pandemic bubble, but in the recent months it has given up all its gains and reverted back to 2019 levels. It's hard to say what caused the spike and decline other than following the general market trends, but it could also have something to do with real estate activity, automobile purchases and stay-at-home dynamics turbocharged by the pandemic.
Goosehead's secret sauce appears to be its IT infrastructure built on the Salesforce (CRM, Financial) cloud and its combination of corporate and franchise channel sales models, as well as its top quality customer service by a dedicated service team.
Source: Goosehead investor materials
Goosehead is currently focused on sales growth, so its earnings are fairly modest. Below is snapshot of the company's income statement. The company is making some money, but not much.
| Goosehead's income statement (TTM) | |
| Revenue | $174.95 million |
| Cost of Revenue | $112.40 million |
| Gross Profit | $62.55 million |
| Other Expenses | $60.18 million |
| Earnings | $2.37 million |
Revenue growth rates are between 30% and 40%. The hope is that the company will be able to achieve solid profitability in a few years as its growth phase tapers off. Right now, it is focused on building its book of business. Once the customer signs on with Goosehead the company hopes to hold on to the customer for repeat business every year. Renewals are much more profitable for the company. Currently, Ebitda margins are in the mid-20% range, but the company thinks Ebitda margins of more than 40% are possible if the growth is scaled down to 10% to 12%. though it is not ready to do that yet, prefering to make the investments necessary to attract new customers till it can build the critical mass necessary so that the momentum generated by its renewal business can become substantial and self-reinforcing.
Valuation
The GuruFocus Value chart is indicating that the stock is significantly undervalued. However, the forward price-earnings ratio is high at 44.
However, the company's GF Score is poor, with weakness all around except the growth rank.
Insiders are also selling, as shown in the below chart:
Conclusion
Goosehead appears to a disrupter in the personal lines insurance industry with a differentiated business model by which it is growing revenues rapidly. While revenues are growing rapidly, earnings are still meagre and the company's debt level is growing. Goosehead is making large investments in its sales channels in the hope that customer relationships will be sticky and it can hold on to business due to its superior customer service. It cites its high net promoter scores as evidence that its strategy is working.
The jury is still out in my mind on whether or not this is a true compounder; it will depend on whether earnings can eventually be ramped up as rapidly as revenues. So for now, Goosehead will go on my watch list. While Akre Capital Management appears to like this stock and the revenue growth is impressive, I want to see some EPS growth and margin expansion as well as sustainable insider buying to get interested in this stock. Technically the stock price is still on a downward trend. While the company has good growth potential, as shown by revenue growth and a very interesting business model, it is still overvalued at a forward prie-earnings ratio of 44.
