Some Goosehead Insurance, Inc (NASDAQ:GSHD) shareholders are probably rather concerned to see the share price fall 44% over the last three months. But that doesn't change the fact that the returns over the last three years have been very strong. Indeed, the share price is up a very strong 240% in that time. After a run like that some may not be surprised to see prices moderate. The fundamental business performance will ultimately dictate whether the top is in, or if this is a stellar buying opportunity.
In light of the stock dropping 15% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive three-year return.
Given that Goosehead Insurance only made minimal earnings in the last twelve months, we'll focus on revenue to gauge its business development. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. For shareholders to have confidence a company will grow profits significantly, it must grow revenue.
In the last 3 years Goosehead Insurance saw its revenue grow at 32% per year. That's much better than most loss-making companies. Along the way, the share price gained 50% per year, a solid pop by our standards. But it does seem like the market is paying attention to strong revenue growth. Nonetheless, we'd say Goosehead Insurance is still worth investigating - successful businesses can often keep growing for long periods.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
It is of course excellent to see how Goosehead Insurance has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Goosehead Insurance's financial health with this free report on its balance sheet.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Goosehead Insurance's TSR for the last 3 years was 254%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Over the last year, Goosehead Insurance shareholders took a loss of 37%, including dividends. In contrast the market gained about 9.2%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Investors are up over three years, booking 52% per year, much better than the more recent returns. Sometimes when a good quality long term winner has a weak period, it's turns out to be an opportunity, but you really need to be sure that the quality is there. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 4 warning signs for Goosehead Insurance you should be aware of, and 1 of them is a bit unpleasant.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.