Why RCI Hospitality Holdings (RICK) Stock is a Compelling Investment Case

Greystone Capital recently released its Q2 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. You should check out Greystone Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

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 lost 21.8% and on August 17th it had a closing price of $16.68. Here is what Greystone Capital said:

“During the first quarter, we entered into a mid-sized position in RCI Hospitality, or as many investors are familiar, Rick’s Cabaret. RICK is a publicly traded strip club business that operates a number of adult entertainment venues across the country, as well as a fast-growing military themed restaurant concept called Bombshells with a focus on the Texas military/army market.

RICK is unlike many of the investments we’ve owned in the past. I’m not a huge fan of the entertainment/restaurant space given the competitive nature of the industry subject to consumer preference, low barriers to entry, and high fixed cost structures making it difficult for most restaurants to weather periods of decreased demand, however, RICK does combine some elements that I find very attractive when looking for new investments. As somewhat a combination of special situation (a few nonpermanent, fixable events have led to a sharp stock price decline) and good business, RICK should be able to continue to grow it’s earning power and free cash flow per share at a solid rate over time. RICK is a business that I’ve followed for a few years now, and the current price seems to represent a very favorable risk/reward provided the business can remain structurally intact throughout COVID-19 shut down, and the management team continues to run the same playbook they’ve been running for the past few years. Clients were emailed a more detailed writeup outlining the opportunity and my thought process behind making the investment. The writeup as an appendix to this letter will also be available on our website.

**Update: the largest risk to the investment is the possibility that some nightclub doors close permanently (and open clubs are forced to implement new social distancing rules due to COVID-19, making the environment less attractive) due to COVID-19 as well as online alternatives. It is possible. In the short term, management has somewhat diversified their revenues and cash flow profile through Bombshells, owns real estate with a book value that exceeds the entire market cap of the company, and could potentially benefit / grow market share during the current environment by acquiring night clubs in favorable locations for cheap prices from distressed owners. Should/when things normalize, I’d expect the company to initiate a large share buyback program in line with their capital allocation philosophy. We are monitoring the situation closely and will take any necessary actions upon the receipt of new information.”

Pixabay/Public Domain

In May, we had published an article revealing that Bireme Capital is bullish about RCI Hospitality Holdings Inc. (NASDAQ:RICK) stock. The investment firm believes that the company would emerge stronger from the virus crisis.

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 seem to agree with 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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Video: Top 5 Stocks Among Hedge Funds

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