Bireme Capital recently released its Q1 2020 Investor Letter, a copy of which you can download below. In the letter, the hedge fund said that its flagship U.S. equity strategy, Fundamental Value, returned -26.4% on a net basis. The fund underperformed its benchmark, the S&P 500 Index which returned -19.4% in the same quarter. You should check out Bireme Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.
In the said letter, Bireme Capital highlighted a few stocks and RCI Hospitality Holdings Inc. (NASDAQ:RICK) is one of them. RCI Hospitality engages in Nightclubs and Bombshells restaurants and bars. Year-to-date, RCI Hospitality Holdings Inc. (NASDAQ:RICK) stock lost 34.7% and on May 22nd it had a closing price of $13.39. Here is what Bireme Capital said:
“We increased our investment in RCI Hospitality in the quarter.
RICK is a publicly-traded owner of night clubs and restaurants. The company has been dramatically impacted by COVID-19, with all of its locations unsurprisingly deemed “non-essential.” The stock has fallen from a pre-COVID level of about $25 per share to an intraday low of $7 per share, the largest decline in any stock we own. Prior to this drop, we had a tiny toehold position of <.5% of NAV with a cost basis of around $15. We began buying in earnest when the price dropped below $10 per share.
Over the years RICK has shown that its business model is superior to many consumer-facing service businesses. RICK boasts:
- Ownership of the vast majority of its real estate
- A history of greater than 20% EBITDA and 10% pre-tax margins
- Profitability during previous downturns, including ’08-’09
- Mostly inept and poorly funded competitors
RICK does have $141m of total debt (about 3x adjusted EBITDA), but this is offset by the value of their owned locations. According to their lender, Centennial Bank — who made this determination in its “sole discretion” — RICK’s $90m in mortgage debt was less than 65% of the fair value of their real estate in October 2019. The 65% loan-to-value (LTV) level was key because it triggered a $250k per month reduction in RICK’s interest payments to Centennial. We are confident, given Centennial’s incentives under this arrangement, that their estimate of the fair value of RICK’s properties was conservative.
RICK’s property value has likely declined by 10% due to COVID-19, in line with other commercial property, per Green Street. But even accounting for this decline, a starting LTV of 60% implies the company may be able to borrow an additional $15-20m against these assets if Centennial will lend to an 80% LTV. This would give RICK significant additional runway to navigate further shutdowns. The company has now reopened 10 of their restaurants in Texas and says they have the cash to operate until the end of September without further borrowing.
We believe RICK will make it through the crisis and that investors buying it at less than 3x potential FCF will be handsomely rewarded.”
In Q3 2019, the number of bullish hedge fund positions on RCI Hospitality Holdings Inc. (NASDAQ:RICK) stock increased by about 14% 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 among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 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. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we asked astrophysicist Neil deGrasse Tyson about Tesla, Elon Musk, and his top stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. You can subscribe to our free enewsletter below to receive our stories in your inbox:
Disclosure: None. This article is originally published at Insider Monkey.
