Bireme Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be seen here. A portfolio net return of 9.1% was delivered by the fund for the third quarter of 2021, handily eclipsing the S&P 500’s return of 0.6%. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Bireme Capital, in its Q3 2021 investor letter, mentioned RCI Hospitality Holdings, Inc. (NASDAQ: RICK) and discussed its stance on the firm. RCI Hospitality Holdings is a Houston, Texas-based nightclub company with a $614.96 million market capitalization. RICK delivered a 73.25% return since the beginning of the year, while its 12-month returns are up by 197.47%. The stock closed at $69.37 per share on November 1, 2021.
Here is what Bireme Capital has to say about RCI Hospitality Holdings, Inc. in its Q3 2021 investor letter:
“The biggest driver of YTD returns was RCI Hospitality (RICK), which is up 80% — from $39 to $70 on the back of extremely strong operating results. Their nightclubs grew revenue 8% vs 2019 to record highs. In their restaurant segment, sales increased 80-90% vs both 2020 and 2019 as they opened new locations and notched large gains in same store sales.
During the third quarter, the company announced a transaction which demonstrates the firm’s long-term opportunity to roll up mom-and-pop operators. This deal, for 11 mostly Colorado-based nightclubs, cost a total of $88m and amounted to an EBITDA multiple of 6.3x, far lower than the median 11.4x multiple paid by private equity firms in 2020. When we run the math, it appears that RICK’s $40m in equity invested will generate about $7.5m in additional free cash flow to stockholders (net of interest payments on the $48m in debt), indicating a return of about 18.6%. Companies with this sort of reinvestment opportunity are rare, and don’t typically trade at less than 20x free cash flow multiple, like RICK does. RICK remains a large position.”
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Based on our calculations, RCI Hospitality Holdings, Inc. (NASDAQ: RICK) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. RICK was in 13 hedge fund portfolios at the end of the first half of 2021, compared to 10 funds in the previous quarter. RCI Hospitality Holdings, Inc. (NASDAQ: RICK) delivered an 8.08% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
