2023 Birthday Buy #1 - $RICK
The time of year has finally come to make my annual addition of new positions to my portfolio, my Birthday Buys.

For those of you that have been following my investing journey, you are most likely aware of the significance of these buys.

If you are new or need a refresher, here's a brief summary:

When I first started managing my own portfolio I was so concerned with being too concentrated. This lead to starting many positions (check out my portfolio), especially ones that I had not done much research on and had no business investing in. The Birthday Buy idea was something I implemented in 2020 to limit initiation of new positions. This marked a significant time in the year and gave me something to celebrate, limit new positions and provide me ample time to make sure new companies were the right fit for my portfolio.

This year I initiated two new positions, both in my Roth IRA. Today I will be covering $RICK, RCI Hospitality Holdings Inc. Hope you enjoy!

Company: RCI Hospitality Holdings, Inc
Ticker: $RICK
Acquisition Date: 1/17/23
Price: $95.18

I was first introduced to $RICK by @stonkmetal in his July Buy the Dip idea. Looking back at the price chart, he definitely bought the dip! I added all the recommendations from the idea competitions to my Scorecard Watchlist, as I have done with each competition since. $RICK immediately rose to the top. $RICK was also interesting because I was looking for a "Sin Stock" to add to my portfolio. $RICK operates 63 gentleman's clubs and restaurants throughout the United States.

I trended $RICK for the past 6 months, but really started research in the last month. As I dug into the company more, the more I was impressed with its performance. Their earnings, Free Cash Flow and dividend has been increasing over the past 4 years (excluding 2020).

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The price chart has reacted accordingly by significantly increasing over the past few months.

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Even after the recent run up, RCI is still at 19.4 times! The charts looked good, now to understand the business.

As I dove into the 2022 10-K, I started to understand the business, opportunities and risks. One thing that I immediately noticed was the limited number of locations across a vast expanse of states. The majority of nightclubs and the restaurant business (Bombshells) are located in Texas. However, they also have nightclubs in 12 other states, including a Rick's Cabaret right here in downtown Pittsburgh, PA. The nightclub business is pretty self explanatory. However, I was very intrigued by the Bombshell restaurants:

"Our Bombshells segment operates a restaurant and bar concept that sets itself apart with décor that pays homage to all branches of the U.S. military. Locations feature local DJs, large outdoor patios, and more than 75 state-of-the-art flat screen TVs for watching your favorite sports. All food and drink menu items have military names. Bombshell Girls, with their military-inspired uniforms, are a key attraction. Their mission, in addition to waitressing, is to interact with guests and generate a fun atmosphere. Bombshells is also franchising under our subsidiary, BMB Franchising Services, Inc., which has been approved to sell franchises in all 50 states."

I like that they have an alternative option to the nightclub business that has approval to franchise in all 50 states. There is definitely a huge risk with gentleman's club operations, regulations, licensing, etc. Another large risk is the risk of government regulation to classify the entertainers currently working as 1099 contractors to full-time employees. With any investment there is risk, so I want to highlight a few up front.

Price History vs S&P: Outperforming S&P for past 3 years, +1
Dividend/FCF Payout: Positive FCF, dividend is less than 50% of FCF (4.34%), +1
Conviction: High (thanks, research), +1
Dividend Yield: Less than median portfolio yield, 0
Portfolio Weighting: 0% weight in Sin Stocks, +1
P/E: < 25 (19.4), +1
Overall: 5/6

Based on the above, I decided to make $RICK one of my Birthday Buys and I look forward to learning more about the company, build a position and hopefully be rewarded with a great business. 2023 is my 3rd year of this strategy, and my process has improved each year. Hopefully these holdings will be the best yet!

I will be doing my next post on my other by in the coming days, so stay tuned!

As always, would like to hear your thoughts/reactions/questions in the comments below!
Heavy Moat Investments's avatar
Awesome! One key note about the club licenses: Many of them are grandfathered in, meaning that they can't be revoked easily. RICK focuses on acquiring clubs where this is the case.



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