Over the past six months, Compass’s shares (currently trading at $8.57) have posted a disappointing 18.4% loss, well below the S&P 500’s 10.9% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Compass, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Compass Will Underperform?
Even though the stock has become cheaper, we don’t have much confidence in Compass. Here are three reasons we avoid COMP, plus one stock we’d rather own.
1. Weak Growth in Transactions Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Compass, our preferred volume metric is transactions). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Compass’s transactions came in at 99,504 in the latest quarter, and over the last two years, averaged 33.2% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Operating Losses Sound the Alarm
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Compass’s operating margin has shrunk over the last 12 months and averaged negative 3.1% over the last two years. Unprofitable consumer discretionary companies with falling margins deserve extra scrutiny because they’re spending loads of money to stay relevant, an unsustainable practice.
3. Breakeven Free Cash Flow Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Compass broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.
Final Judgment
Compass doesn’t pass our quality test. After the recent drawdown, the stock trades at 11.7× forward P/E (or $8.57 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
Stocks We Like More Than Compass
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