Adam Wyden's Strip Club Bet

A bombshell blunder.

Fintwit is the pit of X where old hedge funders, young analysts, and finance noobs go to express their opinions on everything under the sun. I was not around for the earlier days of this mega think tank, but apparently, the banter was strictly confined to stocks. Today, however, you will scroll through the feed and witness impetuous views on politics and college football and investment conversations that quickly escalate into egregious levels of disrespect. Some have gone as far as to say the website is defunct and not of value for the serious analyst.

Okay, well, that may be true. But what if you are not? What if you are just a dunce looking for a good time, sniffing around for the next heated debate, a hit of dopamine? Then finwit is paradise and surely you would have loved the zoo it turned to on Tuesday when news broke that RCI Hospitality Holdings (RCI) – a filthy dirty strip club stock – got popped for bribing its NYC auditor with lap dances to avoid paying $8 million in sales taxes, or taxes on “dance dollars”, an in-house currency that horn dogs cop for private dances and God knows what else.

The OAG’s investigation revealed that RCI and its top executives bribed a former DTF auditor and supervisor, in exchange for favorable treatment during at least six different sales tax audits spanning over a decade. The auditor received at least 13 complimentary multi-day trips to Florida where he was given up to $5,000 per day for private dances at RCI-owned strip clubs, including Tootsie’s Cabaret in Miami. RCI executives paid for the auditor’s hotels and restaurant visits during these trips as well. Additionally, on at least 10 occasions since 2010, Timothy Winata, RCI’s controller and accountant, traveled to Manhattan from Texas to provide the auditor with illegal bribes at RCI’s three Manhattan clubs, Rick’s Cabaret, Vivid Cabaret, and Hoops Cabaret and Sports Bar.

If we assume that each trip cost $10,000, then RICK slid $130,000 under the table over fourteen years. So the mystery auditor did make it rain, but it was a damn good deal for RICK, one that would no doubt increase its intrinsic value. That is, if the gang could hide it from the feds, but of course, they incriminated themselves with text messages.

Mr. Auditor, after a trip in February of 2022, sent a heater off to Winata, typing, “This was the best trip I had in Florida. The girls were very beautiful and nice… I hope we can have another trip before the summer.” This guy couldn’t get enough and Winate kept funding the escapades, which, incidentally, were recorded as “promotional” expenses on RICK’s books.

Accounting tricks are native to RICK, though. Type in the name of RICK’s CEO – Langan, Eric – into the SEC’s Action Lookup - Individuals (SALI) and you will see an enforcement action under his name dated September 21, 2020. In it, you will read that, from 2014 to 2019, RICK executives Eric Langdan and Philip Marshall (CFO) did not disclose $615,000 in compensation in the form of the company’s aircraft and private vehicles, commercial airline flights, charitable contributions to the school of Langdan’s children, and the cost of housing and meals to Marshall.

Given the complete lack of integrity management showcased and the sliminess endemic to this industry, why was this the stock — out of the many thousands — that Wyden, who has routinely pistol-whipped the S&P 500, chose to fall in love with? Mainly because any stock that had operations involving human touch, let alone lap dances, was unduly punished during the pandemic.

As it happens, RICK fell seventy percent, and Wyden went maximally contrarian, catching the falling knife on the belief that pent-up demand would soon catapult the stock. And what initially looked like a doofus move turned out to be genius. Within a year, RICK climbed sevenfold, and Wyden’s fund assets increased to $350 million. His share? $100 million.

Now, knowing well that these newfound riches do get taxed at some point, Wyden waved goodbye to NYC and fled to Miami, where he got busy right away. He built a $4.1 million home, flipped it for a $1.4 million profit, and then bought a larger, waterfront mansion for $13.88 million. The thirty-seven-year-old hedge funder was on top of the world and claimed in an interview with Forbes, “If I never raise another dollar again, I’m going to become a multibillionaire.”

Noooooooo. Why, sir, would you say that? Overconfidence is a consistent killer of investment returns, and comments like this are magnets for vitriol. But it gets worse. On Fintwit, Wyden really lets it rip with bizarre comments like this:

“@Adam_Wyden: I cant fix stupid. I bought my first share of this in the 8s.. I have nothing to apologize for other than SEEING it. I SAW IT at $RACE inside of FCAU at 8 and again at 30 post spin.. LOSERS CANT SEE THE FUTURE. In 12 years when im 49, I will send you a postcard. No pic of my wife”

But you can choose kindness, Adam. This brashness is why fintwitters bombarded the feed with memes and “told you so” posts after RICK was rocked. No one would have really cared about the bombshell news if it weren’t for the big-mouthed portfolio manager’s 9.2% position. Even so, RICK’s quarter-point pounding meant a two-hundred-thirty basis point ding to ADW. A significant single-day drop, but the stock remains a multibagger for Adam. So perhaps Fintwit has started celebrating too early, or maybe the stock’s saga has just begun. I don’t know. Either way, here’s Wyden’s last fintwit since the debacle, just six weeks ago:

@Adam_Wyden: $rick is trading less than value of RE/ PP&E (412.6m gross). Given the big locations in big cities my guess is the market value of this could be > 600 mm. RCI has total debt of ~200mm leaving net RE of 400mm. curr. mkt cap is 308 mm. @RicksCEO @BTaylorUSA @orchardwealth69.

Basically, Wyden is saying the market is not assigning value to the actual business. You can buy RICK today for less than the total value of its real estate, or the buildings that shelter, at times, very illegal activity. So with that said, how does one value these naughty assets with any confidence? I think you can’t, and Munger’s quote “Don’t sell anything you wouldn’t buy yourself” applies nicely here.

Imagine you find the company interesting at first glance, so you read the company filings, fill out a financial model, call industry experts and club managers, etc., and you say to yourself, “These nightclubs and bombshells are real cash cows. I also like the people running them, and management owns a bunch of stock, and they’re buying back tons of shares too. Wyden also owns 10% of the company and has influence with executives. This thing is a screaming buy at 8x free cash flow. Plus, Morals shmhorals, a lapped dance never killed anybody!”

Ok, some solid points. But here is the last stage of your analysis, the final boss, if you will. Travel to Texas for some good ole scuttlebutt, because that’s where twenty-seven nightclubs and twelve bombshells reside. Go to the nearest ATM, withdraw $100, and hit the Jaguars Club in San Antonio, or the Rick’s Cabaret in Odessa, or the Temptations Cabaret in Beaumont.

After that, sleep on what you saw, then wake up and scribble some notes about your experience. Now, would you be a proud owner-operator of one of those clubs? What would Buffett think of this idea? Are those neat, crispy Excel numbers starting to fade? The point is, throw out the financial model and think about the people you are getting involved with. And definitely pass on the stock when Edwin Dorsey posts pictures of the IRS raiding one of its NYC clubs.