Compass Points to Profits

08/27/2014 7:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

Smack in the middle of America's richest county—Fairfield, Connecticut—a select group of "private equity" managers are buying up cash generating companies and using the proceeds to pay investors more than 8% annually in dividends, asserts Tyler Laundon in Daily Profit.
That's a very attractive yield, whether you're an income or a growth investor. Especially since growth in this corporation's subsidiary businesses has powered shares 85% higher over the past three years.
Compass Diversified Holdings (CODI) functions like a private equity firm. It acquires middle market businesses—those with enterprise values between $50 million and $250 million—and works with the acquired companies to improve competitive advantages, grow market share and profitability.
It tends to focus on companies that are owner-managed and have excellent growth prospects, but lack the funds or experience to get to the next level.
From a shareholder's perspective, Compass provides a great example of a publicly traded small-cap stock that generates superior returns for buy and hold investors.
There are several benefits to the private equity business model. A portfolio approach provides the benefits of diversification in one investment. And investors are able to get exposure to great companies that aren't publicly traded but are extremely attractive investments. 
There are also a number of differences between Compass and a traditional private equity firm. Compass is extremely transparent—pull up its latest 10-K annual filing. It is also open to retail investors.

And it isn't over leveraged; it typically funds operations and acquisitions with cash and with a dedicated credit facility, rather than through excessive long-term debt.
Compass's dividend policy is to pay shareholders regular, quarterly cash distributions. When you buy shares of Compass you become a partner in the business and you'll receive the appropriate form K-1 at tax filing time. I recommend the stock for buy and hold investors whenever its yield is above 8%.

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