Greenhaven Road 2Q20 Commentary: RCI Hospitality Holdings

However, Adam’s logic was as follows: the environment has changed, but humans have not changed; this is temporary. The company has the balance sheet to survive this; it owns a ton of real estate, which can be monetized, if necessary. The stock trades at a 30%+ free cash flow yield on normalized earnings, and the CEO has proven himself to be a very good capital allocator. As often happens, Adam was right. The CEO, Eric Lanagan, joined our call and displayed an impressive command of the specifics of individual markets, unit economics, and their drivers, as well as how operating leverage would manifest itself in the cash flow statement. More importantly, he laid out strategies for dealing with COVID and how unit-level economics could be profitable at far lower capacities than traditional restaurants and clubs. The combination of Adam’s enthusiasm and management’s knowledge made it clear that RCI Hospitality Holdings should survive the pandemic, would be a major beneficiary of re-openings, and may, in fact, turn out to be a very painful short.

As stay-at-home orders have been lifted, the happy hours have been less frequent, but there is a camaraderie and cooperation among several managers that I think is constructive. For example, I have participated in several “red teams” for managers where they invite the rest of us to attempt to shred their investment thesis. The team’s role is to ignore any positives of the opportunity and attempt to highlight every clear and potential weakness. For a manager who is an “investment committee of one,” this type of review can be helpful in exposing blind spots. We also continue to have Zoom meetings that focus on individual companies as opportunities arise, since it has been an excellent use of managers’ and company management time.

While the main indexes and large companies have posted strong recovery numbers, there many other areas of the market that remain behind and companies that have been ignored or misunderstood, offering a still-ripe environment for stock-picking opportunity. For what it is worth, my wife added to her investment last quarter and will do so again before the year ends.

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