Quality investing focuses on identifying companies with durable competitive advantages, consistent growth, and strong capital efficiency, aiming to hold them for the long term rather than chasing undervalued bargains. One systematic way to filter for such candidates is a quantitative screen that combines revenue and profit growth, high returns on invested capital, manageable debt, and excellent cash conversion. The stock we discuss today emerged from such a screening process, and its fundamentals align well with the core tenets of quality investing.
Business Profile
Goosehead Insurance, Inc. (NASDAQ:GSHD) is an independent personal lines insurance distributor operating across the United States. The company offers a full range of policies, homeowners, auto, umbrella, specialty lines, and commercial insurance, through both a digital platform (Digital Agent) and a network of local licensed agents. By combining proprietary data with carrier quotes, Goosehead provides clients with customized options and binds policies efficiently. This asset???light, fee???based model generates recurring commission revenue and has allowed the company to scale quickly since its IPO in 2018.
Why Goosehead Passes the Quality Screen
The screening criteria used to identify potential quality investments are demanding. Goosehead meets or exceeds every one of them, as shown by the actual values from the screen.
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Revenue Growth (5???year CAGR) >= 5% – Goosehead’s revenue has compounded at an annual rate of 31.13% over the past five years, far above the minimum threshold. This signals strong market demand and successful expansion of the agency network.
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EBIT Growth (5???year CAGR) >= 5% – Operating profit (EBIT) grew at 30.20% per year over the same period. While this is technically just below revenue growth, which the screen ideally likes to see higher, the absolute growth rate is still outstanding and reflects improving operating leverage.
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Return on Invested Capital (ex???goodwill, cash, intangibles) > 15% – Goosehead’s ROICexgc stands at 32.71%, more than double the minimum. Such a high ROIC indicates that every dollar of core invested capital generates substantial profit, a hallmark of a business with pricing power and efficient operations.
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Debt???to???Free Cash Flow < 5 – The company carries debt equal to 4.46 times its trailing free cash flow. This is within the acceptable range, meaning current free cash flow can theoretically repay all debt in under five years, a comfortable buffer for a growing insurer.
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Profit Quality (5???year average) > 75% – The average ratio of free cash flow to net income over the last five years is 977%. This exceptionally high number means Goosehead converts far more of its accounting earnings into actual cash, largely because depreciation and other non???cash charges are substantial relative to net income. It demonstrates a very healthy cash???generation ability.
The screen also includes a condition that EBIT growth should exceed revenue growth to confirm improving margins. Goosehead’s EBIT growth of 30.20% is slightly below its revenue growth of 31.13%, a small gap. However, the company still shows strong operational performance, and its operating margin has improved in recent years, indicating that the business is moving in the right direction.
Fundamental Analysis Summary
A detailed fundamental analysis of Goosehead assigns it an overall rating of 6 out of 10 compared with 145 insurance???industry peers. The report highlights several strengths:
- Profitability, Goosehead is in the top tier of the industry for return on assets (7.73%) and return on invested capital (24.29%). Both operating and profit margins are solid, and the operating margin has been trending upward.
- Growth, Past earnings per share growth (5???year CAGR of 19.79%) and revenue growth (25.57%) are very strong. Looking forward, analysts expect EPS to accelerate to 24.61% annually and revenue to 31.13%, which could help justify the current valuation premium.
- Dividend, The company pays a dividend yield of 7.32%, far above both the industry average and the S&P 500. The payout ratio (16.43%) is sustainable, though dividend growth is outpacing earnings growth, a trend to monitor.
- Financial Health, Goosehead has an Altman Z???Score of 3.21, well above the safe zone. However, its current and quick ratios are low (0.15), and the debt???to???free cash flow ratio, while acceptable, is slightly worse than most industry peers.
The main drag on the rating comes from valuation, the P/E ratio of 27.84 is expensive relative to the industry and the broader market. Yet the robust growth outlook and strong profitability provide some justification for the premium.
Valuation and Risks
Quality investors are willing to pay a fair price for excellent businesses, but not any price. Goosehead’s PEG ratio (based on forward earnings growth) is in neutral territory, suggesting the current multiple is not insane when set against expected expansion. Nevertheless, the low liquidity ratios and the fact that the dividend growth rate exceeds earnings growth warrant close scrutiny. Any slowdown in new policy sales or a rise in claims could pressure margins and free cash flow, making the debt load feel heavier.
Finding More Quality Candidates
The screen that identified Goosehead uses a strict set of quantitative filters to isolate companies with superior growth, profitability, and financial discipline. To explore other stocks that meet these same demanding criteria, you can run the quality stock screener yourself. The tool lets you adjust parameters and view full fundamental breakdowns for each candidate.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Always conduct your own research before making any investment decisions.
Read full article here »
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Goosehead Insurance (NASDAQ:GSHD): A Quality Stock with Strong Fundamentals
Quality investing focuses on identifying companies with durable competitive advantages, consistent growth, and strong capital efficiency, aiming to hold them for the long term rather than chasing undervalued bargains. One systematic way to filter for such candidates is a quantitative screen that combines revenue and profit growth, high returns on invested capital, manageable debt, and excellent cash conversion. The stock we discuss today emerged from such a screening process, and its fundamentals align well with the core tenets of quality investing.
Business Profile
Goosehead Insurance, Inc. (NASDAQ:GSHD) is an independent personal lines insurance distributor operating across the United States. The company offers a full range of policies, homeowners, auto, umbrella, specialty lines, and commercial insurance, through both a digital platform (Digital Agent) and a network of local licensed agents. By combining proprietary data with carrier quotes, Goosehead provides clients with customized options and binds policies efficiently. This asset???light, fee???based model generates recurring commission revenue and has allowed the company to scale quickly since its IPO in 2018.
Why Goosehead Passes the Quality Screen
The screening criteria used to identify potential quality investments are demanding. Goosehead meets or exceeds every one of them, as shown by the actual values from the screen.
Revenue Growth (5???year CAGR) >= 5% – Goosehead’s revenue has compounded at an annual rate of 31.13% over the past five years, far above the minimum threshold. This signals strong market demand and successful expansion of the agency network.
EBIT Growth (5???year CAGR) >= 5% – Operating profit (EBIT) grew at 30.20% per year over the same period. While this is technically just below revenue growth, which the screen ideally likes to see higher, the absolute growth rate is still outstanding and reflects improving operating leverage.
Return on Invested Capital (ex???goodwill, cash, intangibles) > 15% – Goosehead’s ROICexgc stands at 32.71%, more than double the minimum. Such a high ROIC indicates that every dollar of core invested capital generates substantial profit, a hallmark of a business with pricing power and efficient operations.
Debt???to???Free Cash Flow < 5 – The company carries debt equal to 4.46 times its trailing free cash flow. This is within the acceptable range, meaning current free cash flow can theoretically repay all debt in under five years, a comfortable buffer for a growing insurer.
Profit Quality (5???year average) > 75% – The average ratio of free cash flow to net income over the last five years is 977%. This exceptionally high number means Goosehead converts far more of its accounting earnings into actual cash, largely because depreciation and other non???cash charges are substantial relative to net income. It demonstrates a very healthy cash???generation ability.
The screen also includes a condition that EBIT growth should exceed revenue growth to confirm improving margins. Goosehead’s EBIT growth of 30.20% is slightly below its revenue growth of 31.13%, a small gap. However, the company still shows strong operational performance, and its operating margin has improved in recent years, indicating that the business is moving in the right direction.
Fundamental Analysis Summary
A detailed fundamental analysis of Goosehead assigns it an overall rating of 6 out of 10 compared with 145 insurance???industry peers. The report highlights several strengths:
The main drag on the rating comes from valuation, the P/E ratio of 27.84 is expensive relative to the industry and the broader market. Yet the robust growth outlook and strong profitability provide some justification for the premium.
Valuation and Risks
Quality investors are willing to pay a fair price for excellent businesses, but not any price. Goosehead’s PEG ratio (based on forward earnings growth) is in neutral territory, suggesting the current multiple is not insane when set against expected expansion. Nevertheless, the low liquidity ratios and the fact that the dividend growth rate exceeds earnings growth warrant close scrutiny. Any slowdown in new policy sales or a rise in claims could pressure margins and free cash flow, making the debt load feel heavier.
Finding More Quality Candidates
The screen that identified Goosehead uses a strict set of quantitative filters to isolate companies with superior growth, profitability, and financial discipline. To explore other stocks that meet these same demanding criteria, you can run the quality stock screener yourself. The tool lets you adjust parameters and view full fundamental breakdowns for each candidate.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Always conduct your own research before making any investment decisions.
Read full article here »