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Diversified Opportunities With Compass

May 05, 2020 9:53 AM ETCompass Diversified (CODI) Stock24 Comments


  • The company has diversified businesses in its portfolio and is positioned well post-pandemic.
  • Compass has a strong track record of acquiring great companies during times of economic weakness.
  • Through reduced expenses and operating costs, payout commitments to bond- and shareholders appear manageable.
  • Insider buying has been high, particularly during the intensified sell-off in March.


Compass Diversified Holdings (NYSE:CODI) operates as a middle-market private-equity firm. They acquire, operate, and divest businesses in several niche consumer and industrial end markets.

Since the company's IPO in 2006, Compass has made 20 acquisitions and has performed 11 divestitures. These divestitures have generated realized gains in excess of $1 billion.

Source: Investor Presentation

The company has proven to do better than Mr. Market expects during a crisis (due to its diversification) and outperforms in a recovering economy (through its timely and opportunistic acquisitions).


Compass is structured as a publicly traded partnership and hence, its investors are limited partners who would receive K-1 tax forms. This can result in tax advantages on the distributions for investors, but at the same time, increase complexity of the taxes. Please consult with your tax advisor to understand your situation better.

Compass owns 8 businesses and these "assets" constitute a diversified portfolio of leading brands.

Information Source: Company form 10K

Source: Investor Presentation


Compass issues a $0.36 quarterly distribution, representing a 7.9% yield.

Source: Investor Presentation

The company distributed $101.3 million (including both common and preferred distributions). The company's Cash Available for Distribution (CAD) in 2019 was 1.03 times the total amount distributed. Further, the company has low leverage at this time and based on Q1 conference call discussions, management is prioritizing its liquidity for preferred and common distributions alongside providing support for its companies.

High Insider Buying

Insider ownership in the company has been at its highest level in the past 10 years.

Source: GuruFocus

It is encouraging to see significant insider buying in March when the stock dipped to a 5 year low point due to the intensified COVID-19 sell-off

Source: Insider Monitor

"Essential" segments of Compass

Sterno (represents ~28% of the 2019 Adj EBITDA) on an initial look appears to be extremely

This article was written by

Hidden Opportunities profile picture

Hidden Opportunities, aka Venkat Raghavan, is a former management consultant with a Masters in electrical engineering. He is an expert in high yield/high growth energy stocks

. He contributes to the investing group High Dividend Opportunities led by Rida Morwa and a team of other top Seeking Alpha income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Learn More.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (24)

The Compounder profile picture
Hey @Hidden Opportunities I'm interested in CODI but concerned about if the K1 is worth the complexity around tax time. Do you have some guidance around the extra level of work / cost associated with having a K1 investment? I use a tax preparer and want to know how much more expensive it might be.
Hidden Opportunities profile picture
I'd suggest that you contact your tax preparer to understand how much more it would cost you.
I find this article provides very good detail about MLP and tax obligations.

I personally own a few MLP's which do not have UBTI,and have found that the taxable income is often $0, hence there is no tax paid on the investment now. However, as the author of the article outlines, these distributions will lower the cost basis of the investment, and I will owe taxes when I sell units (capital gains + distributions).

I have only acquired CODI units this year, so I am unable to comment on the tax experience yet. It would be nice to have a CODI unitholder share some comments on how CODI manages the reporting of UTBI and taxable income, so you and I can have some insight on what we will face next year.
Hidden Opportunities profile picture
One thing to keep in mind is that K-1s will be issued around mid March. So you will have to file your taxes closer to the deadline.
It frustrates few people who would like their refunds early.

Enrollment online - www.taxpackagesupport.com/... will get you real time notifications when your K-1 is ready. So you don't have to wait for it in the mail.

It helps to have everything else ready in the interim, so you can file quickly when the K-1 arrives.
Since you are using a preparer, it should be fine I guess.
I own their preferreds and I feel fine.
Hulkamania Brother profile picture
Brother, they're raising capital for something and I fully trust this management team to make the right call.

This isn't a short term investment, but that desn't mean it's a bad investment.
Progressive Contrarian profile picture
The 5m share dilution is offset by a paydown of revolving credit facility. If the borrowing rate of the revolver is higher than 8% notes, this is a net positive immediately. Even if not, management has been exemplary capital allocators. Perhaps they see discounted assets available. We'll see. this morning's share price drop seems overdone.
Unfortunate timing on this one as stock price is going to get crushed here on the shareholder dilution.

I owned this one last year and it has traded like a tech stock since the Barron's article. Bizarre, it's a good company but I suspect 99% of people buying it don't know it issues a K-1. Also, there was significant UBTI last year and will be going forward as they buy and sell holdings. Total no go for a retirement account even if you are ok with the K-1.

Nice overview, but this really needs an update on both the dilution and the UBTI aspect.
Hidden Opportunities profile picture
Hi @Paul Petterson
Thanks for reading my article and sharing your comments.
My article publication timing unintendedly coincides with the shareholder dilution (though it was submitted several days prior).

You mentioned K-1, so I had a quick question about the one issued by CODI. Could you tell me which US states CODI reports income in as on the K-1?
Understandable, I know there is a review delay.

I love the company, but I have to say I'm perplexed by both the share issuance and the private placement.

I will get back to you on the K-1, not at home at the moment.
I admit, I overlooked that they issue a k-1 (yes, I'm one of the 99%'s!). Thank you, Paul, for pointing that out.
pbeasyliving profile picture
Thank you for your output @Hidden Opportunities Do you see any short-term volatility or gaining a stronger foothold with this move 'Compass Diversified Holdings Announces Proposed Private Add-on Offering of $200 Million of 8.000% Senior Unsecured Notes Due 2026'?
Hidden Opportunities profile picture
@pbeasyliving - Thanks for reading and sharing your comments.
I see CODI's business fundamentals to be weak in Q2 and Q3, because that is where I see the true impact of COVID-19 on businesses.
Compass raising cash through dilution and additional borrowing is perhaps with an eye on an acquisition target.

To summarize, I see some short term disappointments are likely, but this is a good long term hold!
ESGFIRE profile picture
Do you expect dividends to stay on the same level in Q2 as Q1 and for the remainder of 2020?

How does the dividend track record look for compass ?

Thanks in advance
Hidden Opportunities profile picture
Hello @filip erhardt - I think the distribution would be maintained.
Q2 began in April.
The firm paid out its previous distribution end of April, a time when business was the most difficult (end of Apr, early May). If the company felt the need to hold back the distributions for liquidity, they could have done so in April. Several companies announced their dividend cuts in Apr.

CODI has maintained the $0.36 quarterly dividend since Q2- 2011.
ca7711 profile picture
Great article. Thank you. Any thoughts on them pushing the capital raise button? Looking like 280-300million in capital going to be raised here. Add that to the 400 million currently available and think we see a much larger opportunity of future out performance. CODI's management has seemed to be exemplary with its timing on navigating these times. Big fan of what they are doing. We just need the economy and COVID resolution/timing to cooperate.
pbeasyliving profile picture
Hi @ca7711 Any thoughts on why the stock is down almost 10% since opening? Thanks
ca7711 profile picture
Selling pressure from the dilution i imagine.
pbeasyliving profile picture
Do you think it's exhausted from this pressure or do you see it continuing? Where is a good entry point in your opinion?
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