Shareholders of Compass Diversified would probably like to forget the past six months even happened. The stock dropped 65.5% and now trades at $7.11. This might have investors contemplating their next move.
Is there a buying opportunity in Compass Diversified, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Compass Diversified Not Exciting?
Even with the cheaper entry price, we're cautious about Compass Diversified. Here are three reasons why we avoid CODI and a stock we'd rather own.
1. Revenue Growth Flatlining
We at StockStory place the most emphasis on long-term growth, but within financials, a stretched historical view may miss recent interest rate changes, market returns, and industry trends. Compass Diversified’s recent performance shows its demand has slowed as its revenue was flat over the last two years. 
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
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for 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 flat revenue and tells us management responded to softer demand by adapting its cost structure.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Return on equity, or ROE, tells us how much profit a company generates for each dollar of shareholder equity, a key funding source for banks. Over a long period, banks with high ROE tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.
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 isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 3× forward P/E (or $7.11 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
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