Should You Invest in RCI Hospitality Holdings Inc. (RICK)?

Greenhaven Road Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A commendable net return of 14% was recorded by the fund for the Q1 of 2021, outperforming the S&P  500 Index that delivered a 6.17% return for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Greenhaven Road Capital, in their Q1 2021 investor letter, mentioned RCI Hospitality Holdings, Inc. (NASDAQ: RICK), and shared their insights on the company. RCI Hospitality Holdings, Inc. is a Houston, Texas-based nightclub company that currently has a $646 million market capitalization. Since the beginning of the year, RICK delivered an 81.66% return, impressively extending its 12-month gains to 538.57%. As of April 30, 2021, the stock closed at $72.81 per share.

Here is what Greenhaven Road Capital has to say about RCI Hospitality Holdings, Inc. in their Q1 2021 investor letter:

RCI Hospitality (RICK) – Last year, during some of my braver moments, I bought a basket of companies that I believed would survive the pandemic and that would reward us for taking a risk. One of those companies was RCI Hospitality, which operates a restaurant brand and upscale gentlemen’s clubs. In August 2020 when we purchased the shares, you could not have paid me to go into an enclosed club, let alone gotten me to pay a cover charge to enter an enclosed club. Add in the fact that pandemic restrictions had most of the clubs closed or operating with severe capacity and open-hour restrictions, and the financial outlook appeared bleak. It was that thinking that drove many investors to short RCI, along with cruise ships, movie theaters, and other businesses in the vice grip of the pandemic. In my opinion, shorting RCI Hospitality was a “lazy” short because RCI owns all of their real estate, qualified for PPP loans, and has a resourceful management team that navigated the pandemic extremely well. However, it was also a popular short with more than 15 days of trading volume sold short.

As the world reopens, they are set to generate several dollars per share in free cash flow and are beginning to franchise their restaurant concept. We purchased our shares on the premise that they would survive the pandemic and we were buying on a low single-digit multiple of normalized free cash flow. As many shorts have covered and we have transitioned from peak fear to moderate optimism, the price is up more than 4X from our initial purchases. What started as part of a basket has appreciated into a top five position. At the time of our RICK purchases, only Adam Wyden of ADW Capital was pounding the table.”

Our calculations show that RCI Hospitality Holdings, Inc. (NASDAQ: RICK) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, RCI Hospitality Holdings, Inc. was in 7 hedge fund portfolios, compared to 5 funds in the third quarter. RICK delivered an 84.08% return in the past 3 months.

The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

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Disclosure: None. This article is originally published at Insider Monkey.