A More Aggressive Compass Diversified Holdings Could Be Better For Its Shareholders

For most of the time I've followed Compass Diversified Holdings (NYSE:CODI), my feelings have been some version of "it's alright… I guess". Indeed, since my first piece on the company for Seeking Alpha, a positive write-up, the shares have basically matched the S&P 500 on a total return basis. Likewise, since my last piece, with a total return just a bit below the S&P 500.

Some of my lack of enthusiasm can be traced to what I've felt was a lack of capital recycling activity - a management team too willing to be passive and hold its portfolio instead of making more opportunistic transactions. That seems to be changing, with management selling several businesses in recent years and putting out a multi-year growth target that will require more acquisitions and faster revenue growth from its portfolio.

This strategy does carry some risk, but Compass brings a lot of positives, including a low cost of capital, an attractive operating structure for potential founder-sellers, and far more patience and long-term focus than most private equity buyers. I do consider a competitive M&A environment to be a risk, and the valuation today isn't spectacular, but I think this is a "steady as she goes" investment idea with some opportunities for outperformance-driven upside.

 

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A More Aggressive Compass Diversified Holdings Could Be Better For Its Shareholders