Small-Cap Compass Diversified Holdings Offers Opportunity

| About: Compass Diversified (CODI)


9% Dividend Yield.

Shares Selling at Book Value.

An Annual Return of 14% over 9 Years.

In 2006, Compass Diversified Holdings (NYSE:CODI) went public. An investment of $10,000 at that time, while the ink was still damp on the company's stock certificates and with the faithful reinvestment of dividends would have grown to nearly $40,000 today. That equates to an annual return of over 14%, double that of the S&P 500 over the same time frame. Interested? Read on.

CODI currently has 8 companies in its portfolio. If you'll allow me, I'll list them, not to bore you, but to illustrate just how seriously this company takes its name. Here they are.

1. Advanced Circuits. A manufacturer of printed circuit boards.

2. Arnold Magnetic Technologies. A manufacturer of engineered magnetic solutions.

3. Clean Earth. An environmental service company.

4. ErgoBaby. A designer, marketer and distributor of baby products.

5. Liberty Safe. A builder and seller of home and gun safes.

6. Manitoba Harvest. An enterprise in the natural foods industry.

7. Sterno Candle and Lamp. A company in the food service industry.

8. Tridien Medical. A maker of medical support services and patient positioning devices.

There's one more member of the Compass family that has struck out on its own, as it were. Its name is Fox Industries and it produces high end suspension parts for mountain bikes, snowmobiles and all-terrain vehicles. Compass obtained Fox in 2008 and generated $200 million in proceeds from subsequent public offerings in 2013 and 2014. Compass still owns 41% of Fox. In case you're interested, the symbol for the company is FOXF and in case you are still interested, CODI's holding in Fox Industries is worth around $21 million.

CODI isn't averse to selling companies it owns if the numbers justify it. As of last year, for instance, Codi sold Camelbak, an outfit engaged in the marketing of hydration products, for a gain of 165 million. Conversely, also in 2015, Compass parted company with American Furniture for an impairment of about $14 million. This amount, I might add, is in addition to past impairments related to American. Kenny Rogers is right. "You got to know when to hold 'em know when ___." Sorry, I've always liked that tune and it seemed to fit so well. Anyway, over the last decade, CODI has realized nearly $500 million in revenue from asset sales and given the fact that CODI is a thriving enterprise, I think it would be safe to assume that most of those sales were profitable.

I'm sure that most of you are familiar with the old Chinese adage that states "May your life be an interesting one." For those of us in the market, the start of 2016 has illustrated how keenly that double-edged saw can cut. In times like these, a boring consistency in at least a portion of a portfolio can offer some much needed comfort. Compass Diversified paid its first quarterly cash distribution in 2006 and has continued to reward shareholders ever since. At the end of this month, CODI will pay out a distribution of $.36 a share, which in conjunction with all the other distributions over the years comes in at over $13 a share; maybe consistency isn't so boring after all. One last mention of consistency is in order. CODI hasn't raised its distribution in nearly 5 years, but a 9% yield makes this fact more than palatable.

At present, the shares of Compass are trading at book value with a forward PE of 12. The current ratio is 2.5, the level of leverage is reasonable and CODI is generating sufficient free cash flow to support its distribution.

Insiders own a significant chunk of CODI's float: a good thing. In contrast, institutional appetite for the conglomerate's shares is far from hearty; a better thing.

Perhaps the most interesting of CODI's acquisitions is the latest, Manitoba Harvest. I suggest you go to their website and watch the video. From a modest start in 1998, the company's health food products are sold in over 7,000 stores.

I listened to a portion of Compass's third quarter conference call and management seemed particularly excited about the prospects of ErgoBaby, Manitoba Harvest and Sterno Candle. If you'll indulge me in exercise of a rather lame metaphor, I'll refer to the companies just mentioned as CODI'S thoroughbreds. As to the rest of the horses in CODI's stable, Advanced Circuits and Arnold Magnetic Technologies are plow horses experienced very modest growth, Liberty Safe is in rehab after a rough 2014, Clean Earth is in training and Tridien Medical is pulling its weight.

I'm sure you've realized by now that CODI isn't what one would consider a growth stock. Management is particular when it comes to making acquisitions and I get the sense that they have no desire to increase the size of their portfolio substantially in the near future. But if you are a young investor, with time and discipline in your corner, the numbers in the first paragraph of this article should speak to you.

If you are an old investor, the first bullet in the summary of this article shouldn't speak to you; it should scream at you.

Do your homework and let me know what you think. Thanks.

Disclosure: I am/we are long CODI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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