When building wealth through the stock market, one of the most straightforward ways is to buy the best companies and hold them for the long term. When looking for top stocks, you want to find stellar businesses with positive motivations that can drive future growth.
One company that is often overlooked by investors is insurance brokers. Insurance companies are well positioned to benefit by helping customers find insurance premiums that match their risk tolerance. Two insurance businesses that have prospects for future growth are Marsh & McLennan (MMC -2.59%) and Goosehead Insurance (GSHD -12.00%).
1. Marsh & McLennan Companies
Marsh & McLennan advises companies on risk, strategy, and workplace issues. The company helps companies manage risks and connects them with insurance that helps mitigate those risks. Risk and insurance services make up 60% of Marsh & McLennan’s revenue, with consulting making up the rest.
What makes Marsh & McLennan unique is that it is a trusted advisor to companies looking to address risks and issues such as compensation, retirement plans, and green business adoption. This constant demand helps the insurance broker’s income to grow continuously. Over the past decade, Marsh & McLennan’s revenue has grown at a 6% annual rate (CAGR), while its net income has grown at a 13% CAGR.
Marsh & McLennan also has a few tailwinds that benefit its business today. First, rising insurance rates have benefited the industry. That’s because Marsh & McLennan receives commissions from clients that are paid to the insurers they connect. According to the Marsh Global Insurance Market Index, insurance prices rose 9% from last year, and insurance prices have risen 19 quarters in a row.
The company has also benefited from strong demand for its services in an uncertain economic environment. In recent years, companies have been struggling with product quality issues, low prices, volatility in capital markets, and the transition to green energy. Dan Glaser, CEO of Marsh & McLennan, told investors that “when the world is unstable, the demand for our services increases.”
Marsh & McLennan has the ability to do well in any market, so the prospect of a recession doesn’t affect the company too much. According to Glaser, the company has grown its earnings per share (EPS) every fiscal year since 1962, making it an excellent buy and hold.
2. Goosehead Insurance
Goosehead Insurance is an organization that sells insurance through its headquarters and franchisees. The company has invested heavily in technology to create franchisees, which it sees as its long-term growth strategy. Since 2019, the company’s premiums have grown at 31% CAGR, while its premiums have grown at 52% CAGR.
The company sees the franchise method as its golden ticket to long-term revenue generation through revenue sharing. In the first license agreement, which lasts for about ten years, Goosehead earns a 20% commission from those who sell its products. Goosehead fees then jump to 50% when the borrower renews their contract.
Goosehead’s number increased by 25% in the second quarter compared to last year, bringing its total franchises to 1,344. The company has seen strong growth this year on the top line, with revenue up 36% to $94 million. Operating expenses also increased, mainly from staff salaries, as well as operating expenses. As a result, Goosehead has a net income of about $2 million after posting a $1 million profit through six months last year.
It’s important to remember that Goosehead spends a lot of money on new salespeople while onboarding and training employees on the business. However, in the long run, the debt payments could be very beneficial for Goosehead, which is why I think the stock has the potential to be very good for the long term.
Courtney Carlsen has no responsibility in any of the matters mentioned. The Motley Fool owns and recommends Goosehead Insurance, Inc. The Motley Fool has a disclosure.