Compass Diversified In Buy Range After Clearing Handle Buy Point

Compass Diversified NYSE: CODI is a modern spin on the old-fashioned holding company. On Tuesday, it cleared a cup-with-handle base above a buy point of $32. Trading volume was more than triple the average mid-session. 

Tuesday’s breakout followed a gain of 6.96% Monday, in volume 300% heavier than normal. 

Compass describes itself as “a publicly-traded investment and holding company that provides shareholders with unique access to niche middle-market businesses – an attractive segment of the market historically reserved for traditional private equity or other legacy players.”

This is a value proposition that should be of interest to investors who want an easy way to access high-growth small companies that are not yet listed on the capital markets. Compass’ portfolio companies include BOA, The Sterno Group, 5.11, Altor Solutions, ergobaby, Advanced Circuits, Velocity Outdoor, Arnold Magnetic Technologies, Marucci, and Lugano Diamonds. That represents wide diversification of industries. 

In the model of venture capital and private equity firms, Compass aims to exit its investments for a profit. In July, it announced the sale of Liberty Safe for a gain of $72.7 million. 

Compass went public in 2006. While the stock has more than doubled in price since then, it’s worth drilling down a bit more to understand how it’s bounced back from a steep decline in December 2018. In the past three years, the stock has climbed 158%, outpacing the S&P 500’s three-year return of 65.46%. 

According to MarketBeat earnings data, Compass topped earnings and revenue views in the past eight quarters. 

When the company reports its fourth-quarter early next year, analysts expect earnings of $0.54 per share on revenue of $508.39 million. Both would mark year-over-year increases. 

In addition to the earnings and revenue results, highlights of Compass’ third quarter include: 

• Completed the sale of Liberty Safe for an enterprise value of $147.5 million and recorded a gain on the sale of $72.7 million
• Closed on the acquisition of Lugano Diamonds and Jewelry for an enterprise value of $256 million
• Paid a cash distribution of $0.36 per share on CODI's common shares in October 2021
• Paid a special cash distribution of $0.88 per share on CODI’s common shares in September 2021 
• Declared quarterly cash distributions of $0.453125 per share on the company's 7.250% Series A Preferred Shares, $0.4921875 per share on the company's 7.875% Series B Preferred Shares, and $0.4921875 per share on the company's 7.875% Series C Preferred Shares 

“CODI’s strong momentum continued in the third quarter as we generated outstanding results primarily due to heightened demand at our leading consumer brands,” said Elias Sabo, CEO of Compass Diversified, in the earnings statement. 

“With our permanent capital structure giving us flexibility through economic cycles, we have remained focused on building businesses for the future and supporting the brands we own,” he added. “We are proud of our subsidiary teams, who have worked diligently to expertly navigate this current inflationary period by adeptly managing supply chains and prioritizing our customers, and believe they continue to be well-positioned to grow.”

In the earnings conference call, Sabo elaborated upon supply-chain and labor shortages that have the potential to be a drag on results in the current quarter. 

The company updated its guidance, based partly on the sale of Liberty Safe and the acquisition of Lugano Diamonds, both of which occurred in the quarter. 

“The net effect of the M&A transactions we completed were to increase our guidance by $10 million on a pro forma basis,” said Sabo. “This would have made last quarter's guidance range increase to $360 million to $380 million on a pro forma basis to include the acquisitions and divestitures.”

“As you will see from this analysis, we are raising our guidance by $20 million on the bottom of the range and $10 million on the top of the range,” he added. 

The stock is very much in buy range at the moment, as it’s trading around $32.11, only a few cents above its buy point. However, the market has been in whipsaw mode lately, and a broad pullback could drag the stock down. As long as you monitor whether it remains within about 7% from that buy point, it could be worth holding.