Reliance Global Group, Inc. (NASDAQ:RELI) is an insurtech company that combined advanced technologies with a more traditional insurance agency model. RELI stock is flirting with penny stock classification as it is trading below $6 a share. I do not like the stock now as I see only empty promises by the firm that fail to add value to the shareholders.
Growth in any business is not just related to only one dimension. It should be analyzed on the whole business ecosystem. There are several warning signs that make me bearish on RELI stock.
A View at Reliance Global Group Business Model
The firm is stating that it has a focus on growth. More specifically, it is written that “Reliance Global Group’s growth strategy includes both an organic expansion, including 5MinuteInsure.com, as well as acquiring well managed, undervalued and cash flow positive insurance agencies.”
Additionally, the company mentions that “We engage in the acquisition and management of wholesale and retail insurance agencies in the United States.” And that RELI’s focus is to pursue an aggressive growth strategy of acquisitions in insurance brokerages and other financial service companies.
This theory sounds nice, like a well-written marketing text. Where do I see the problems that make me bearish on the stock?
Growth Strategy: Evaluating the Latest Results
There are several concepts of growth, from the moderate one to the rapid one and the very aggressive growth that Reliance Global Group is focusing on.
Having a diverse portfolio of companies is not always a good business decision. The same applies to a growing portfolio too. The main role of the business if it is a public company is to create value for its shareholders. By value, I do not mean an elevated stock price that is the outcome of a short-squeeze phenomenon that will be a temporary boost. I mean long-term value or to make it more down to the point for investors to buy the stock and generate well risk-adjusted returns.
The first argument of mine related to growth is that sales growth by itself is not enough for a company to claim — it is pursuing an aggressive growth strategy. It is like seeing the tip of an iceberg, a lot of things are hidden under the surface, and these hidden factors can be highly critical and can completely change the perception of what investors think about RELI stock focusing only on one key metric.
Novice investors will look at sales growth for Reliance Global Group and think of it as a top growth stock. In 2019 revenue grew 21,453.44% to $4.45 million from $20,650 in 2018. 2020 was a year of 63.56% revenue growth. This growth is a positive factor for sure. I question though the financial results of the company. And, the fact that this growth has a high cost, namely stock dilution which is bad for investors.
Reliance Global Group at its Investor Presentation in Dec. 2021 has mentioned several interesting insights about the effectiveness of its business model.
Reading about economies of scale, acquiring growing and profitable businesses at below-market prices, management expertise in acquiring and managing these companies and the group itself are all factors that can provide strong reasons to buy the RELI stock, given one condition is met, actual financial results are strong and positive.
Reliance Global Group ended the third quarter of 2021 with over $6.1 million of cash and restricted cash and a solid balance sheet to execute on the growth objectives. Expected operating savings and positive cash flows are expected by the insurtech firm.
What are the main factors I am too concerned about now? There are four key metrics.
Four Reasons of Concern About RELI Stock
First earnings have declined by 28.7% per year over the past 5 years. Second, shareholders have been substantially diluted in the past year, with total shares outstanding growing by 177.6%.
Third, free cash flow for 2019 and 2019 has been negative, a trend that has continued in the first nine months of 2021. Fourth, operating income is negative both on an annual and on a quarterly basis.
In the past, I have mentioned that companies like Reliance Global Group that report narrower net losses as the result of stock dilution are in fact “misleading” investors not searching for the real reason for this improvement. It is simply math, the larger number of shares outstanding results in dividing net losses and artificially making them look smaller.
The total operating expenses in Q3 2021 increased approximately 10% year-over-year. An aggressive growth strategy of the Reliance Global Group will probably increase these operating expenses more soon. This brings me to the bottom line of my thesis. A look at growth itself neglecting other fundamentals is naïve investing. Not so clever or effective.
Bottom Line
The sales growth which is positive is only one side of the story behind a company that wants to explore an economic moat in the insurance industry. The other more analytical look is supporting a bearish sentiment. The massive stock dilution over the past year and the inability to report positive operating and net income show negative growth in profitability.
Take the return on equity (ROE) ratio for example. A very important key metric reflects how much net income a company generates per dollar of invested capital and provides information on how efficiently a firm uses capital to generate profit. On a trailing 12-month (TTM) basis, the ROE of -43.78% for RELI stock is too poor.
Investors who want to speculate may like the stock believing in the promising success story. But ultimately now I see no success story yet. Avoid RELI stock now makes sense as the expertise of the management is struggling with profitability and is losing the battle.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.