Most investors claim to have a long-term orientation, but as soon as the market becomes volatile, they lose patience and forget about the big picture.
Suddenly, they start to fix on daily price movements, and the red color makes investors feel very uncomfortable.
A rational, long-term thinking investor would rejoice at the lower prices and buy the dips if the thesis is intact. But too often, investors for the exact opposite. They sell due to even lower prices, which then exaggerates the sell-off even further.
I find this very interesting because it shows you the importance of psychology in investing. A lot of investors lack self-control, act against their best interests, and make decisions based on biases instead of facts.
But others’ mistakes can be your opportunity.
Today, once again, share prices are crashing because investors have lost sight of the long-term outlook and become overly concerned about short-term prospects. Granted, we live in the uncertain world and may face recession in the short run, but companies should be based on decades of expected cash flow, and, therefore, the negative impact of a 1-2 year recession really isn’t that significant.
I think that it is a great time to accumulate more positions in solid long-term compounders that have recently become undervalued. In the following 10 years:
RCI Hospitality Holdings, Inc. (RICK)
I have previously highlighted RICK as one of my largest investments.
I believe that it offers a realistic path to 20% annual returns, and that is rare in today’s market. Sure, there are a lot of innovative tech companies (QQQ) that could achieve such returns if they succeeded, but none of them offer the same level of predictability.
If you are not familiar with the company, RICK is the only publicly-listed strip club company in the world. Now, you’ve probably never thought of strip clubs as investable assets, but they can be great businesses. Their supply is limited, but everyone wants to party. It is not possible to obtain new licenses because of NIMBY (“not in my backyard”), and, as a result, the existing clubs are mooring businesses that enjoy a quasi-monopoly in their local markets, earning consistent and predictable cash flow.
At the same time, we are in a new world of people wanting experiences over things, and this is especially true in the post-Covid world.
But if RICK was just a passive strip club owner, I’m probably not interested. Consolidating this fragmented sector with high rates of return is what makes it so compelling.
RICK is able to buy these moated businesses at 3-4x EBITDA, earning ~ 30% cash-on-cash returns, which is a huge spread over its cost of capital.
RICK is getting such good deals because there are few strip club buyers out there. The reality is that these assets are uninvestable for most people because of reputational and operational risks. Your wife probably doesn’t want you to buy a strip club. You certainly have at least a few limited partners who are against it. And, even if you could, you probably don’t have the unique skill-set to manage these assets.
This gives RICK an important competitive advantage.
It is literally the only company in this space that has access to public capital, and it is able to buy moated businesses at high rates of return.
We think it is a path to 20% + annual free cash flow growth, which is more or less what it has achieved over the past years leading up to the pandemic.
You would expect to buy it today at just 6-7x normalized free cash flow. The company is buying back shares and insiders are also adding to their large positions.
Alexandria Real Estate Equities, Inc. (ARE)
Most of my wealth is in REITs (VNQ) today. I think heavily in REITs because I think they have the best risk-to-reward prospects in a world of high inflation and elevated uncertainty. They may not be the highest returning investments, but you are not taking much long-term risk.
ARE a good example of that. It is the leading biotech and pharmaceutical companies like Moderna (MRNA), Pfizer (PFE), and Sanofi (SNY).
The company just recently upped its guidance and noted that it expects hike rents on expiring leases by 30% + in 2022. There is a strong demand for modern life-science buildings in the post-Covid world, and ARE is the leader in this space . Most of its leases are well below market, and this provides a “bank” of predictable growth for the coming years.
Its business is also recession-resistant, and the company only has little leverage and long debt maturities.
Despite that, its share price recently dropped by 20% when the market sold off. I think this selloff makes little sense because they were already slightly discounted priced prior to it.
I believe that the company has 30% upside potential. Beyond that, it now has the potential to deliver ~ 12% annual returns over its coming decade and growth prospects. That’s very attractive coming from the safest blue-chips in the REIT sector.
Big Yellow Group Plc (UK: BYG / OTC: BYLOF)
My favorite self storage REIT also recently dropped by ~ 20% without any particular reason.
I think that this drop was mainly caused by the fact that it is perceived as a “growth” investment. It was lumped in with other “growth stocks,” and that was enough to cause substantial value.
But what the market seems to have missed is that self-storage facilities are some of the best.
Leases are short, so you can quickly adjust higher, and since they are likely to find a cheaper alternative to their stuff, they are likely to vacate even during recessions. After all, it can be ever cheaper to downsize your residence or office and rent storage space for the extra stuff if your budget is tight.
The largest American self-storage REITs, Public Storage (PSA) and Extra Space (EXR), are attractive, but I prefer Big Yellow because it is the leader in Europe and I think the European self-storage market has a lot more potential over the coming decade.
Today, there is about 10 square feet of storage space per capita in the US, but only about 1 in Europe. It is still a relatively new concept in Europe, but its popularity is growing rapidly.
BYG is capitalizing on this undersupply, has little competition from other players, and has developed long-term growth as it develops new facilities all over Europe. This earns high spreads relative to its cost of capital.
We believe that the company has 25% upside potential, and beyond this, it has the potential to deliver ~ 14% annual returns from its yield and growth prospects. That may seem like a lot, but it’s actually in-line with what it has historically achieved:
Coming from a recession-proof business, the risk-to-reward is very compelling.
During times of volatility, it is good to remind yourself of what we went through in early 2020. The collapsed market. It seemed like the end of the world was near.
Despite that, it only took 6 months for the S & P500 (SPY) and other indexes to hit new all-time highs.
It is easy to lose patience and panic sell when everything is dropping one day after the other. But what do you need to do: buy solid long-term compounders like RICK, ARE and BYG while they are cheap. It will pay off handsomely in the long run.