If you are looking for the best ideas for your portfolio you may want to consider some of Saga Partners top stock picks. Saga Partners, an investment management firm, is bullish on Trupanion Inc. (NASDAQ:TRUP) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Trupanion Inc. (NASDAQ:TRUP) stock. Trupanion Inc. (NASDAQ:TRUP) is a pet insurance company.
In August 2019, Saga Partners had released its Q2 2019 investor letter. Trupanion Inc. (NASDAQ:TRUP) stock has posted a return of 177.4% in the trailing one year period, outperforming the S&P 500 Index which returned 9.2% in the same period. This suggests that the investment firm was right in its decision. On a year-to-date basis, Trupanion Inc. (NASDAQ:TRUP) stock has risen by 90.2%.
In Q2 2019 investor letter, Saga Partners said the fund posted a return of 11.3% in the second quarter of 2019, outperforming fund’s benchmark the S&P 500 Index which returned 4.30% in the same period. Let’s take a look at comments made by Saga Partners about Trupanion Inc. (NASDAQ:TRUP) stock in the Q2 2019 investor letter.
“Sales and adjusted operating income grew a respective 25% and 36% in 2018 and are expected to grow a respective 25% and 31% in 2019. We shared our Trupanion write up in last quarter’s letter which outlined our investment thesis in more detail.
Every year the CEO writes one of the most detailed and transparent annual letters we have come across from a public company. He lays out his long-term goals, what the company is doing well, and what the company can improve upon. Trupanion has been a publicly traded company for five years and we now have five annual letters to go back and track what the CEO has said and then compare to what happened and the results are more than impressive. If only all CEOs followed suit!
From the beginning of the 2018 annual report;
“This letter is being published a few months shy of our five-year anniversary as a public company. Looking ahead to the next five to ten years, our annual goal is to grow revenue 20% to 30%, achieve and maintain an adjusted operating margin of 15% of revenue, and reinvest as much of it as possible while achieving an anticipated internal rate of return between 30% and 40% for a single average pet. If we can achieve these three goals on an annual basis while continuing to build moats around our business and maintaining our culture, we will have had a good year.”
The U.S. pet insurance industry is a large and under-penetrated market, with premium volumes growing over 20% a year in total and Trupanion leading the way as the second largest insurer and quickly approaching the #1 provider, Nationwide Pet Insurance.
Trupanion has several advantages. It benefits from providing the highest value pet insurance coverage for premiums charged, i.e. low-cost provider. It also has a large network of territory partners throughout the country who built relationships over multiple years with animal hospitals. It also has its point of sale software, Trupanion Express, which provides the ability to speed up claim payment and pay animal hospitals directly to veterinarians.
On the surface, Trupanion’s financials may look unusual in that they have no GAAP earnings. This is because insurance premiums are priced at a 30% above expected claims expense, called Trupanion’s “pricing promise”. The average loss ratio for a specialty property insurer is 56% vs. Trupanion’s 70% target, hence the best value proposition relative to competitors.
Trupanion has been cash flow positive since 2016. After paying 70% of premiums received towards claims, Trupanion has 30% of premiums to pay all other operating costs. Once all nonmarketing operating costs are paid, Trupanion uses the remaining cash to reinvest in pet acquisitions costs to grow the business, resulting in essentially no GAAP earnings but very strong growth. Once Trupanion reaches scale at 650,000-750,000 insured pets, it expects to have ~15% adjusted operating margins at which point it will be very difficult for any competitor to offer a similar value proposition.
Often growth and earnings are at odds with each other. As long as Trupanion is able to effectively reinvest capital at attractive incremental rates of return, it should invest as much available capital as possible. The lower the earnings today, the greater the growth in future cash flow, and therefore the higher intrinsic value.”
In Q1 2020, the number of bullish hedge fund positions on Trupanion Inc. (NASDAQ:TRUP) stock remained unchanged from the previous quarter (see the chart here). Our calculations showed that Trupanion Inc. (NASDAQ:TRUP) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.