Dealmaker’s Diary: A Unique Play on Private Equity

Alpesh Patel|January 25, 2024

Editor’s Note: Welcome to the Dealmaker’s Diary! Each week, hedge fund CEO and trading champion Alpesh Patel will give you an inside look at how he analyzes stocks with his proprietary – and award-winning – Growth-Value-Income (GVI) system. Plus… he’ll share the secrets to his decades of success as an investor, entrepreneur and Dealmaker to royalty.

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As a private equity investor, I saw firsthand how the sector took a hit as interest rates in the U.S. rose quickly over the past two years.

But as the talk of rate cuts spreads and borrowing gets cheaper… so will investments in private equity.

And that’s likely why the stock I have for you this week popped up on my GVI radar.

I haven’t analyzed a company like this for Manward readers before…

This $1.5 billion conglomerate provides capital and management services to medium-sized businesses… and then sells those businesses off for a profit.

It scores an 8 out of 10 on my GVI rating system – the first test a stock must pass for me to consider it (I will look only at stocks that score a 7 or higher). And it is trading at a forecasted P/E ratio of only 11.

But what I really like is how the stock’s momentum has picked up. We could see it return to the highs it hit in 2022.

Get all the details on the company – including the ticker – in my latest video.

And if you have a stock you’d like me to run through my GVI system, send the ticker to mailbag@manwardpress.com.

 

Transcript

Hi, everyone. I have a very different Stock of the Week from any of the ones I’ve ever done before, I believe.

I don’t think I’ve done a company quite like this one. It is Compass Diversified Holdings.

Now, they’re essentially in private equity. In other words, what they’re doing is, they’re providing capital to and investing in middle-market businesses, which they can then help transform their growth with the money that they’re providing and the discipline, the experience, the expertise. And then they might basically sell some of those businesses at a higher valuation as a result of that, just like a private equity firm would. And what this allows them to do, of course, is be diversified naturally, Compass Diversified, for a start.

It is, therefore, very much a conglomerate. And that means you’ve got that inherent diversification within there. The private equity market has been doing rather well over the last year, and I don’t see any reasons for it not to continue doing that.

The company has operations in the U.S., Canada, Europe, Asia-Pacific and elsewhere. They’ve got a market cap of $1.5 billion. So, of course, they’re by no means small… and have revenues of $524 million as well.

Okay, so let’s have a closer look at some of the numbers which attracted me to the company. My team puts ideas before me each week, and I then narrow those down and vet them. And this is one of the ones that I’ve selected.

Now, as you will know, one of the things I do is, I look at my proprietary Growth-Value-Income indicator. And what that does is, it weighs the valuation of a company with its growth – revenue growth, for instance, profit growth – and dividend yields, and weighs that out of 10. This is an 8. Anything with a 7 or higher is good enough for me.

The forecast P/E is at a multiple of 11 – not cheap, but not expensive by any means. Remember, it’s not a technology company, where you’d expect the forecast P/E to be a lot higher. So the share price is at a multiple of 11 times future expected profits per share. As I say, it’s not particularly expensive but also not ridiculously cheap.

Cash return on capital invested is not phenomenal at the moment. And you’ll notice this is one of the factors that I look for. If you want to know why it’s important, click here. But as you know, in my GVI Investor research service, we have really stringent requirements. But with Stock of the Week, I give a bit more leeway.

Price performance… it’s been okay. Sortino – the average return for the volatility – is not fantastic, but I’ll give it a bit more leeway on that.

Looking at the share price, it’s still at 2020 levels… pretty much, actually, at 2019 levels.

And it’s had periods – for instance, after COVID – where it’s bounced up significantly, as it did from 2020 up until the start of 2022. And what I’m looking for now – having seen it sell off from there and go sideways for such a long time – is for that momentum to start picking up again and take it back to the highs that it had in 2022. That’s the idea. That’s the plan.

I couldn’t get a discounted cash flow valuation on this one. However, earnings are forecast to grow. And, as I say, it looks relatively undervalued as well. A lot of people on Wall Street also think it’s undervalued, from the analysts forecasts.

So that’s where we are with that one. It’s different from what we’re used to, but there’s nothing wrong with that.

Thank you very much.

View Alpesh’s archive here.