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Is Compass Diversified Holdings (CODI) A Good Stock To Buy?

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Debasis Saha
·6 min read
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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Compass Diversified Holdings (NYSE:CODI)? The smart money sentiment can provide an answer to this question.

Compass Diversified Holdings (NYSE:CODI) was in 3 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 7. CODI has experienced a decrease in hedge fund interest lately. There were 4 hedge funds in our database with CODI holdings at the end of June. Our calculations also showed that CODI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Ken Griffin
Ken Griffin

Ken Griffin of Citadel Investment Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website.With all of this in mind let's analyze the latest hedge fund action regarding Compass Diversified Holdings (NYSE:CODI).

How are hedge funds trading Compass Diversified Holdings (NYSE:CODI)?

Heading into the fourth quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CODI over the last 21 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CODI A Good Stock To Buy?
Is CODI A Good Stock To Buy?

The largest stake in Compass Diversified Holdings (NYSE:CODI) was held by Royce & Associates, which reported holding $13.5 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $1.3 million position. The only other hedge fund that is bullish on the company was Citadel Investment Group.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Marshall Wace LLP. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified CODI as a viable investment and initiated a position in the stock.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Compass Diversified Holdings (NYSE:CODI) but similarly valued. We will take a look at PDC Energy Inc (NASDAQ:PDCE), First Midwest Bancorp Inc (NASDAQ:FMBI), HeadHunter Group PLC (NASDAQ:HHR), Delek Logistics Partners LP (NYSE:DKL), 360 Finance, Inc. (NASDAQ:QFIN), Retail Opportunity Investments Corp (NASDAQ:ROIC), and Talend S.A. (NASDAQ:TLND). This group of stocks' market caps are similar to CODI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PDCE,24,211888,1 FMBI,17,43845,6 HHR,8,18061,3 DKL,1,2964,0 QFIN,15,49651,3 ROIC,19,53660,-1 TLND,28,587292,0 Average,16,138194,1.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $138 million. That figure was $16 million in CODI's case. Talend S.A. (NASDAQ:TLND) is the most popular stock in this table. On the other hand Delek Logistics Partners LP (NYSE:DKL) is the least popular one with only 1 bullish hedge fund positions. Compass Diversified Holdings (NYSE:CODI) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CODI is 20.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 28.1% in 2020 through November 23rd and surpassed the market again by 15.4 percentage points. Unfortunately CODI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CODI investors were disappointed as the stock returned 3.6% since the end of September (through 11/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.

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