We have seen a major development with one of my favorite unknown stocks — Compass Diversified Holdings (CODI), a unique company that we've owned since 2016, explains Jimmy Mengel, growth and income investing expert and editor of The Crow's Nest.
Compass Diversified Holdings is a private equity firm specializing in acquisitions, buyouts, and middle market investments. It seeks to invest in manufacturing, distribution, consumer products, and business services sectors.
One thing I like about Compass is its strict definitions of its acquisition strategy. It has a six-step process of identifying companies to acquire that reads simply but has lead to astounding success.
An ideal acquisition candidate for Compass Diversified Holdings has the following characteristics:
• Is an established, U.S.-based company
• Maintains a significant market share in a defensible industry niche (i.e., has a “reason to exist”)
• Has a solid and proven management team with meaningful incentives
• Has low technological and/or product obsolescence risk
• Maintains a diversified customer and supplier base
• Generates minimum EBITDA of $8 million
That seems like a quality approach to me — and it has been working since it started in 2006. This has allowed Compass to acquire a series of companies that fit into niches that may go unnoticed by other acquisition companies.
They include companies that produce items like circuit boards, gun safes, baby-wearing products, and high-end magnets — and, our current focus, hemp.
All told, Compass owns and manages nine very diversified subsidiaries, which have continued to produce growing cash flow — which it has doled out to investors via a very robust dividend. It currently yields over 9% on its dividend.
But one of the reasons I initially invested was the fact that they had a hemp and cannabis operation under their umbrella. I found it to be forward thinking at the time.
At that time, I wrote that Manitoba Harvest was a pioneer and global leader in branded, hemp-based foods. I noted that the company’s products were the fastest growing in the hemp food market and among the fastest growing in the natural foods industry. I also noted that hemp foods are not the same as eating marijuana as you will not get high.
Anyway, our bet has paid off. They just sold off Manitoba Harvest to Tilray (TLRY) — one of the largest marijuana companies in the world.
We’re now up 46% on Compass, and I expect them to continue to find niche markets to sell off at just the right time. I still like CODI. They buy weird stuff cheap, and sell it when it's popular and expensive. It's a rather simple business model.
We’re still buying the stock for the 9% dividend alone. If the stock goes up, great. Meanwhile, the company is still quite unknown: the market cap is just $972 million and the average volume is 264,000. The 52-week is $11.60-18.35. I wouldn’t pay more than $18.00.
