Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Compass Diversified Holdings CODI stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Compass Diversified has a trailing twelve months PE ratio of 16.8, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 19.25. If we focus on the long-term PE trend, Compass Diversified’s current PE level puts it below its midpoint of 20.81 over the past five years. Moreover, the current level stands well below the highs for the stock, suggesting that it can be a solid entry point.
Further, the stock’s PE also compares favorably with the Zacks Finance sector’s trailing twelve months PE ratio, which stands at 14.58. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Compass Diversified has a forward PE ratio (price relative to this year’s earnings) of just 14, which is higher than the current level. So, it is fair to expect an increase in the company’s share price in the near term.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Compass Diversified has a P/S ratio of about 0.78. This is a bit lower than the S&P 500 average, which comes in at 3.33x right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
If anything, this suggests some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Compass Diversified currently has a Value Score of A, putting it into the top 20% of all stocks we cover from this look. This makes Compass Diversified a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the P/CF ratio (another great indicator of value) comes in at 6.65, which is far better than the industry average of 10.64. Clearly, CODI is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Compass Diversified might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of F and a Momentum Score of B. This gives CODI a Zacks VGM score — or its overarching fundamental grade — of C. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been robust at best. The current year has seen five estimates go higher in the past sixty days compared to none lower, while the next year estimate has seen one up and one down in the same time period.
This has had a positive impact on the consensus estimate though as the current year consensus estimate has risen by 5.8% in the past two months, while the next year estimate has inched lower by 0.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Compass Diversified Holdings Price and Consensus
Compass Diversified Holdings price-consensus-chart | Compass Diversified Holdings Quote
Apart from this somewhat mixed trend, the stock has just a Zacks Rank #2 (Buy) which is why we are looking for outperformance from the company in the near term.
Compass Diversified is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Further, a strong industry rank (among Top 17% of more than 250 industries) instills our confidence. However, over the past two years, the Zacks Financial – Investment Funds industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Compass Diversified Holdings (CODI) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research