Stocks have gotten off to a lackluster start in 2022, with the S&P 500 index down about 8%. However, investors shouldn't let this recent sell-off derail their long-term investment strategy.
In the long run, stocks are a great source of generating wealth. In the past three years, the S&P 500 is still up 62%, including the pandemic plunge and the recent selling.
Market sell-offs can give investors good opportunities to buy companies at lower prices. One stock trading a lot cheaper today is Goosehead Insurance (GSHD 3.13%). The insurance company is down 59% from its 52-week high, and analysts are bullish on the stock, giving it a 93% upside from its closing price on Wednesday.
A fast-growing insurance agency
Goosehead is in the business of selling insurance through its corporate-owmned offices as well as through franchisees. The company began selling out of its corporate offices and then used this knowledge to take the business to the next level, expanding through franchise agreements in 2012. At the end of 2021, Goosehead had 1,198 operating franchises, with another 953 franchise agreements ready to be onboarded.
Goosehead makes money from commissions from the policies it sells, based on a percentage of the total insurance premiums placed on behalf of clients. It also makes money from royalty fees. These are fees paid by franchisees tied to the gross commissions relating to policies sold through the franchise.
Goosehead saw franchises as a way to drive faster growth and scale -- and it has paid off. Since 2017, Goosehead's premiums sold grew at a 31% compound rate through its corporate channel and 56% through its franchise channel.
Image source: Goosehead Insurance
Why franchisees will drive Goosehead's long-term growth
Management sees the franchise channel as an excellent path toward long-term recurring growth. Much of that has to do with how its profit share with franchises is structured. When Goosehead first brings on a franchise, it will receive 20% in royalties from the franchise. Franchise agreements are 10 years long, with two optional five-year renewal terms.
When franchisees renew their terms, Goosehead earns royalties of 50% -- a big step up, and where earnings growth really begins to accelerate. Management prefers these types of revenues because they are predictable and have higher margins than other revenue sources. In 2021, renewal commissions and royalties accounted for 56% of Goosehead's $151 million in revenue.
Image source: Getty Images.
The key to growth: customer satisfaction
Since the company went public four years ago, it has increased its policies in force by 44% and its premiums placed by 45% compounded annually. Growth was solid in 2021, as Goosehead surpassed 1 million policies in force, up 42% during the year. This drove another year of solid premium growth, up 45%.
One key to Goosehead's growth has been a positive customer experience. Net promoter score measures customer loyalty and satisfaction, with a scale that ranges from -100 to 100. The higher the score, the more likely customers are to recommend a company to peers. Goosehead touts a net promotor score of 91, nearly 2.3 times the industry average.
The company has also invested in its platform, which can give clients quotes for home, auto, condo, renters, and other insurance types with as little as three data points. These quotes are powered by machine learning, utilizing the 30 million quotes Goosehead has made over the years. Management sees this platform as another driver of growth for the company.
With a steady history of growth and a royalty structure that favors it in the long run, it's no wonder analysts are high on the stock. The eight analysts covering Goosehead give it an average price target of $138 per share, representing a 93% upside from Wednesday's closing price of $71.45. Goosehead has done a stellar job of managing its business, and it has the pieces in place to continue this growth for the next decade and beyond.
