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Compass Diversified Holdings: The Pandemic Could Fuel Asset Growth

Jenks Jumps profile picture
Jenks Jumps


  • Compass Diversified Holdings reported 2020 first-quarter results on April 30th. Despite stable results, due to the COVID-19 pandemic, it withdrew full-year guidance.
  • The shutdown in economic activity because of the pandemic should help reset asset prices. Compass is focused on building up its capital availability to be ready to capitalize on acquisition opportunities.
  • Between divestitures in 2019 and preferred stock, common stock and add-on senior notes offerings, the company will not owe under its credit facility.

There's always a bull market somewhere.

One of Jim Cramer's 25 Rules For Investing proposes that, even in the worst of times, there are opportunities for gain.

No doubt, the COVID-19 pandemic has created an economic downturn and caused market turmoil. Yet, there are companies positioned to not only survive but profit.

Because Compass Diversified Holdings (NYSE:CODI) had positioned for acquisition, it's on my list of companies positioned to survive. Whether the company will profit from this phase of turmoil will likely be determined by its next acquisition decisions.

Positioned For Acquisition

Compass Diversified invests in and operates middle-market niche businesses in both the consumer and industrial sectors. It operates similarly to a BDC (business development company) or a private equity firm.

In 2019, Compass recorded $331 million in gains on the divestitures of two of its businesses, Manitoba Harvest and Clean Earth. In the Manitoba transaction, the company received both cash and Tilray (TLRY) shares. Those shares were sold at a loss of $10.2 million.

In November 2019, Compass issued 4.6 million shares of its 7.875% Series C Cumulative offering (CODI.PC) for $115 million. The first call date is January 30, 2025.

The company used the proceeds from the divestitures and preferred stock issue to pay down long-term debt. In 2019, long-term debt dropped from almost $1.1 billion to less than $394.5 million.

At year-end, with $100 million in cash on its books, Compass Diversified had prepped its balance sheet and leverage position for acquisition.

We currently have more capital availability than at any time in our history, and our leverage remains well below our target level - at only 1.5X. (emphasis added)

As well, it seemed Compass was purposely targeting larger businesses than it had in the past. The company's success with 5.11 Tactical, its largest acquisition to date at approximately $405

This article was written by

Jenks Jumps profile picture
I am a self-taught investor. As a member of an investment club, I provide the majority of research to the club. When I started writing for SA, the club was interested in stocks offering growth at a reasonable price (GARP) and stocks that were undervalued. We have since adopted a dividend growth investing (DGI) strategy. We search for GRAVY - our acronym for "GR"owth "A"bility, "V"alue and "Y"ield. I am very interested in other active investors critiquing my research. I believe this critique will make me a better investor for my own interests as well as the club's.

Analyst’s Disclosure: I am/we are long CODI, CODI.PA. 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.

I belong to an investment club that owns shares in CODI and CODI.PA.

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 (10)

Is there a schedule K with this?
Jenks Jumps profile picture

Yes, it is a partnership so there is a K-1. I am trying to get in the habit of including that information.
On the FOXF note, they purchased it for 80 Mil in 2008 and today it's worth 2B. I can see that when it was first IPOed in 2013, the valuation was even higher. Impressive!

Question I have is regarding the preferred shares: what's the difference among CODI.PA, CODI.PB, and CODI.PC? They all offer similar dividend rate.
Jenks Jumps profile picture

The Series A is a fixed rate issue with a call date of 7/30/22. It is not cumulative.
The Series B will convert to a floating rate from its fixed rate if not called. The call date is 4/30/28. It is cumulative.
The Series C is fixed and cumulative with a call date of 1/30/25.

Thanks for taking the time to add the additional details on FOXF.
Don't know if I wold consider CODI similar to a BDC.

Usually BDCs manage a portfolio of mostly loans
with at times equity stakes in select (usually dozens) of

Looks to me that CODI buys the equity positions in
small, middle market firms and invests to optimize
the operations for a future sale.

Buying equity in middle market firms is much different
than extending mezzanine financing. A BDC simply
wants its client firms to repay the loan plus the agreed
upon interest income. BDC loans are pre-paid relatively
frequently through out the year. New loans are originated
all the time by BDCs in the normal course of their
investing operations.

CODI wants to hold equity for as long as it takes to
''turn around'' the business prospects so a future sale
can be made at a profit for CODI.

......to me CODI seems more like a private equity investment
rather than a BDC play. Owning equity carries more risk
but more potential reward, and a longer time horizon.

I feel its inaccurate for an investor to think of CODI as
being similar to a Business Developemnt Corporation.
Yes, it's a smaller scale PE firm, like TDG or BRK-A/B.
Jenks Jumps profile picture

Thank you for providing added color on BDCs as compared to Compass Diversified. I typically include a longer blurb in my Compass articles detailing the differences and just didn't this time.
The similarity stems from the distribution. Though Compass is not required to distribute earnings like a BDC, its yield is typically higher than the average company.
Would you be looking to add shares and at what price? Also, do you see more value in the regular shares or the preferred?
Jenks Jumps profile picture

Thanks for taking the time to read and comment!
My investment club is probably in a unique situation. Our Compass Diversified common shares had already doubled and we'd recouped our original investment. We'll continue to reinvest dividends on the remaining shares.
Because we were purposely building some stability in our portfolio, we then took the proceeds from that divestiture and invested in the preferred A issue. The preferred C issue was announced just days later. If we invested again, I'd recommend we invest in the preferred C issue because it is cumulative.
My club has not yet opted to begin investing again since the pandemic.
David.options.2021 profile picture
One big difference is that CODI and the preferred issues issue a K-1
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