Greystone Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. Greystone is a privately held investment company. The investment firm seeks to simplify and add value by identifying opportunities in good and bad markets. During the third quarter of 2020, returns for separate accounts managed by Greystone Capital ranged from +10.4% to +22.4%. The median account return was +15.8%. You should check out Greystone Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Greystone Capital highlighted a few stocks and RCI Hospitality Holdings Inc. (NASDAQ:RICK) is one of them. RCI Hospitality Holdings Inc. (NASDAQ:RICK) owns and operates gentlemen’s clubs and sports bars/restaurants. Year-to-date, RCI Hospitality Holdings Inc. (NASDAQ:RICK) stock gained 16.5% and on November 6th it had a closing price of $23.88. Here is what Greystone Capital said:
“During the third quarter, I increased client positions in RCI Hospitality following positive announcements coupled with better than expected Q2 performance by the company. The increased allocation combined with gains in market value of 80-100% from our original purchase prices has caused RICK to become the largest position in your portfolios. While the possibility of reducing the position from a risk management standpoint occasionally weighs on my mind, we haven’t sold a single share as I believe material upside still exists over the next 12-18 months. In addition, I think I’d find it counterproductive to sell a business I like a lot, with material upside available, only to then generate cash to be able to find another business like the one we are currently holding. Despite the price appreciation, RICK remains one of the better bargains in client portfolios as well as among the universe of companies on my watchlist. During 2021, RICK could exceed $200mm in revenues and generate somewhere in the neighborhood of $30-40mm in free cash flow. The current market cap is under $200mm. We are also invested alongside a CEO who has spent his entire career building this business and has a maniacal focus on delivering value to shareholders including himself as the second largest owner of the company. In addition, management has shown the willingness and desire to repurchase large amounts of shares when the opportunity presents itself as well as undergo strategic acquisitions at high cash on cash returns which have to date resulted in material value creation. Both of the aforementioned capital allocation moves were put on hold as the company was focused on moving through COVID-19. Now that it seems the worst is hopefully behind us, I would expect to see buybacks and eventual acquisitions taking place at favorable prices.
Part of the investment thesis for RICK was predicated on an eventual recovery in performance of their nightclub segment due to nationwide COVID-19 closures and restrictions. While RCI spent the majority of the past three to five months operating with a fraction of their venues open at reduced capacity, the business is slated to be fully operational by the end of this month (September 30th), and should see very positive operating results from key markets and locations in New York City, Florida and Texas. It’s my belief that locations in New York City and Florida alone are capable of producing company wide EBITDA of $20-30mm on a potentially reduced operating expense run rate and the potential for increased prices from bottle service and cover charges.
Other positive developments include the company’s stellar performance of their Bombshells restaurants during a period of time when nearly 1/3rd of US restaurants may not recover from the coronavirus impact. While Bombshells is capable of generating material EBIT as it stands right now, there exists significant option value in the future of this business segment. As of now, the concept has been expanded slowly as RCI tests their core markets, but moving forward there remains the potential for concept/market expansion, franchising, joint venture opportunities with a larger restaurant business, or the potential licensing of the brand name for high margin royalty income. I become even more optimistic about Bombshells when looking at their current comps (even adjusting for pent-up demand and higher than normal COVID traffic) and remembering that their current footprint is 10 restaurants. Ten. This compares to nearly 100 Twin Peaks locations and over 400 Hooters around the country. The potential runway for Bombshells growth is incredibly long.”
In August, we published an article revealing Greystone Capital bullish investment thesis on RCI Hospitality Holdings Inc. (NASDAQ:RICK) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on RCI Hospitality Holdings Inc. (NASDAQ:RICK).
In Q1 2020, the number of bullish hedge fund positions on RCI Hospitality Holdings Inc. (NASDAQ:RICK) stock increased by about 11% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in RICK’s growth potential. Our calculations showed that RCI Hospitality Holdings Inc. (NASDAQ:RICK) isn’t ranked among the 30 most popular stocks among hedge funds.
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