“You’re about to discover the details on my favorite stock.
“Not because it’s cool (it is), not because the company makes a ton of money (they do), but because their growth model has almost no end in sight.
“They’re growing so fast because they’re filling an age old need and charging a premium for it. They’re catering to a clientele more than willing to shell out its hard earned money. And they’re growing by gobbling up all of the little guys.”
That’s a quote from an ad signed by Bret Jensen, who’s trying to get folks to sign up for his new Small Cap Gems newsletter at Investors Alley. And it looks like it’s the first teaser pick he has pitched for potential subscribers, so shall we see what it is?
We shall indeed. As befits a new letter (and a Monday morning), it’s not the absolutely most difficult teaser pitch to solve — other than the fact that many folks will be surprised that there’s a public company in this sector. But let’s walk through the garden of clues he provides…
“Another investing strategy I took from the book [Peter Lynch’s Beating the Street] was how powerful a market leader growing market share by acquiring less efficient firms in a very fragmented industry could be….
“Another company I have recently taking a stake in has an opportunity to consolidate and prosper within a more exotic space.
“And that’s the company I want to share with you today.
“It’s in a space that some investors may not even think to explore while others may be put off by the nature of its business. One should never be put off by potentially raking in double, even triple digit gains assuming the company is engaged in legal and ethical activities. And this one is.
“An Old Type of Entertainment with an Expanding Base
“This company is the nation’s leading hospitality company in adult clubs and the only play in the space that is a publicly traded company. It owns and operates just over 40 clubs in 10 states with half the company’s overall revenues come from fast growing Texas.
“And the stock is selling for just under over $11 a share.
“Breathtaking Growth through Consolidating a Fragmented Industry = Profitable Endeavor”
So yes, this is that stock that occasionally comes up when pundits write their semiannual articles about “sin stocks” and investing in tobacco, alcohol and gambling… the strip club stock.
Know it offhand? Don’t worry, we’ll get to it in a moment.
(We’re not keeping any secrets, we’re just building the anticipation. Taking it off one piece at a time, as it were).
Jensen tells us that the “adult club” is fragmented, and that there are substantial economies of scale to be had in “rolling up” the industry — consolidating to cut overhead costs, get better deals from distributors, etc. And they also, by rolling up the industry, get “grandfathered in” on locations — “adult entertainment” is not always a desired local business, so starting up a new club is apparently difficult. I guess that’s why Porky’s was out in the middle of the woods.
And then a bit on the numbers — about why this is such a good business:
“This company’s clubs are not for everyone but the business model is very attractive on an economic basis compared to other plays in the hospitality space such as restaurants and bars.
“Gross margins in those areas average a bit more than 35% on average on a historical average. This company’s gross margin company wide at its clubs is north of 85%.
“Operating margins are over 20% which is mostly unheard of in the restaurant sector. As can be seen below, the company gets high margin revenues from a variety of sources.”
And some new stuff that they’ve been doing to bolster the bottom line and grow: