Over the past six months, Compass Diversified’s shares (currently trading at $6.06) have posted a disappointing 19.4% loss, well below the S&P 500’s 10.4% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Compass Diversified, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is Compass Diversified Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why CODI doesn't excite us and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within financials, a stretched historical view may miss recent interest rate changes and market returns. Compass Diversified’s recent performance shows its demand has slowed as its annualized revenue growth of 1.6% over the last two years was below its five-year trend. 
Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.
2. Recent EPS Growth Below Our Standards
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Compass Diversified’s EPS grew at an unimpressive 9.2% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.6% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Return on equity, or ROE, quantifies bank profitability relative to shareholder equity - an essential capital source for these institutions. Over extended periods, superior ROE performance drives faster shareholder wealth compounding through reinvestment, share repurchases, and dividend growth.
Over the last five years, Compass Diversified has averaged an ROE of 1%, uninspiring for a company operating in a sector where the average shakes out around 10%.
Final Judgment
Compass Diversified’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 2.2× forward P/E (or $6.06 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Compass Diversified
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