Shareholders of Compass Diversified would probably like to forget the past six months even happened. The stock dropped 65.1% and now trades at $7.31. 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.
Why Is Compass Diversified Not Exciting?
Despite the more favorable entry price, we're swiping left on Compass Diversified for now. Here are three reasons why CODI doesn't excite us 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) 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 doesn’t pass our quality test. After the recent drawdown, the stock trades at 3.1× forward P/E (or $7.31 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 a top digital advertising platform riding the creator economy.
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