Short interest in Compass Group shares declines by a massive 76% in less than 2 weeks

In addition to the huge short interest decline, Compass Group grew its net income a staggering 168.42% from £133m for 2020 to £357m for 2021.

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During times of high uncertainty as we’ve experienced recently, I believe it’s important to value businesses providing necessities more so than businesses providing luxuries. In the case of Compass Group (LSE: CPG), the necessity is food as humans will always need to eat, therefore there will always be a need for the services it provides.

Compass Group is now the world’s largest contract caterer, operating in around 45 countries worldwide. The locations Compass Group offers its services include schools, offices and factories. In addition to this, it also runs an impressive variety of bakery outlets, coffee shops and vending machines. The company was founded in 1941 and currently has a market cap of over £27bn.

Compass pointing in the right direction

Compass Group saw a major decrease in short interest during January. On 15 January the total short interest was 376,800 shares; however, as of 31 January, the total short interest was 90,900 shares. The short interest decline was 75.9% in less than two weeks, and Credit Suisse Group raised its target price on Compass Group from $26.37 to $28.40 on 7 February. The company also recently disclosed a dividend yield of 0.71%, which will be paid to shareholders on 10 March.

Compass Group operates with large diversification geographically, as it is in many countries around North America, Europe and Asia in particular. It is now increasing operations in high-growth countries such as India, Brazil and Indonesia, as it sees larger growth potential in these countries over the decade ahead.

In addition to geographic diversification, Compass Group also offers wide sector diversification. Sector revenue was well diversified for 2021: healthcare was 33%, education was 18%, defence was 10%, business & industry was 31% and leisure was 8%.  Within these sectors Compass Group has many large business-to-business partnerships, including companies such as Canteen, ESFM, Eurest and Bon Appetit.

Sustainable contributions

In addition to the progress of boosting profits, Compass Group is also progressing with its sustainability goals for 2022. A ban on air freight of fresh fruit and vegetable produces will see a focus more on increasing the use of local and seasonal products. With fruit and vegetable produce being its second biggest buying category, this means it will significantly reduce its carbon footprint.

Reasons for concern

Even though the compass seems to be pointing in the right direction, there are still some reasons for concern. Firstly, its price-to-earnings ratio is currently 85.82, which is up from 76.16 for 2021. Also, its price-to-cash-flow ratio is up to 25.45 from 22.59 in 2021. In addition to this, Deutsche Bank downgraded Compass Group from a “buy” rating to a “hold” rating in a research note on 20 January.

The stock price currently seems to be in neutral “hold” territory for many Wall Street analysts at the moment. I’m watching this stock closely as it offers diversification across many high-growth economies in a wide variety of industries.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Sabir Husain has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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