Compass Diversified’s stock price has taken a beating over the past six months, shedding 64.8% of its value and falling to $6.16 per share. This might have investors contemplating their next move.
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?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons we avoid CODI and a stock we'd rather own.
1. Lackluster Revenue Growth
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 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
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 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 (ROE) reveals the profit generated per dollar of shareholder equity, which represents a key source of bank funding. Banks maintaining elevated ROE levels tend to accelerate wealth creation for shareholders via earnings retention, buybacks, and distributions.
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 2.5× forward P/E (or $6.16 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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