Compass Diversified’s stock price has taken a beating over the past six months, shedding 63% of its value and falling to $7.57 per share. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Compass Diversified, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Compass Diversified Not Exciting?
Even with the cheaper entry price, we don't have much confidence in Compass Diversified. Here are three reasons 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 (ROE) measures how effectively banks generate profit from each dollar of shareholder equity - a critical funding source. High-ROE institutions typically compound shareholder wealth faster over time through retained earnings, share repurchases, and dividend payments.
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 doesn’t pass our bar. After the recent drawdown, the stock trades at 3.3× forward P/E (or $7.57 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of Compass Diversified
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