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 focusing on daily price movements, and red the color makes investors very uncomfortable.
A rational, long-term investor would welcome the price drop and buy the dips if the thesis is intact. But too often, investors do the exact opposite. They sell for fear of even lower prices, which further exaggerates the sale.
I find this very interesting because it shows you the importance of psychology in investing. Many investors lack self-control, act against their best interests, and make decisions based on bias rather than facts.
But the mistakes of others can be your opportunity.
Today, once again, stock prices are collapsing because investors have lost sight of the long-term outlook and become too preoccupied with the short-term outlook. Yes, we live in an uncertain world and may face a recession in the short term, but companies must be valued on the basis of decades of expected cash flow, and therefore the negative impact of a 1 to 2 years is really not that. important.
I think now is a great time to build larger positions in strong long-term compounds that have recently become undervalued. In what follows, I highlight three of my favorite stocks for the next 10 years:
RCI Hospitality Holdings, Inc. (RICK)
I’ve already highlighted RICK as one of my biggest investments.
I invest so much in it because I believe it offers a realistic path to 20% annual returns, which is rare in today’s market. Of course, there are plenty of innovative technology companies (QQQs) that could achieve such returns if they were successful, but none of them offer the same level of predictability.
If you are unfamiliar with the business, RICK is the only publicly traded strip club company in the world. Now, you probably never thought of strip clubs as investable assets, but they can be great businesses. Their offer is limited, but everyone wants to party. Obtaining new licenses is nearly impossible because of NIMBY (“not in my backyard”), and as a result existing clubs are stave businesses that enjoy a virtual monopoly in their local markets, earning constant and predictable cash flows.
At the same time, we are in a new world where people want experiences rather than things, and this is especially true in the post-Covid world.
But if RICK was just a passive strip club owner, I probably wouldn’t be interested. What makes it so attractive is that it consolidates this fragmented sector with high rates of return.
RICK is able to buy these staves at 3-4x EBITDA, earning around 30% cash yields, which is a huge spread over its cost of capital.
RICK does such good business because there are few strip club buyers. The reality is that these assets are uninvestable for most people due to reputational and operational risks. Your wife probably doesn’t want you to buy a strip club. You certainly have at least a few sponsors who oppose it. And, even if you could, you probably don’t have the unique skills to manage those assets.
This gives RICK a significant competitive advantage.
It is literally the only company in this space that has access to public capital, and it is able to buy stave companies at high rates of return.
We believe it is on track for annual free cash flow growth of over 20%, which is more or less what it achieved in the past few years before the pandemic.
You would expect such a company to trade at a fairly high valuation, but for some reason you can buy it today at only 6-7 times normalized free cash flow. The company buys back shares and insiders also add to their large positions.
Alexandria Real Estate Equities, Inc. (ARE)
Today most of my wealth is in REITs (VNQ). I invest heavily in REITs because I believe they offer the best risk-reward prospects in a world of high inflation and high uncertainty. They may not be the most profitable investments, but when you buy high-quality properties with long-term leases at reasonable prices, you don’t take on a lot of long-term risk.
ARE is a good example. It is the leading life sciences real estate REIT and it leases space to all major biotech and pharmaceutical companies such as Moderna (MRNA), Pfizer (PFE) and Sanofi (SNY).
The company just raised its forecast and said it expects to raise rents on expiring leases by 30% or more in 2022. There is strong demand for modern life science buildings in the post-Covid world, and ARE is the leader in this field. . Most of its leases are well below market, providing a predictable growth “bank” for years to come.
Its business is also recession-proof, and the company has little debt and long debt maturities.
Despite this, its stock price recently fell 20% when the market sold off. I think this sale doesn’t make much sense because ARE was already slightly discounted before.
I believe the company has a 30% growth potential. Beyond that, it now has the potential to generate annual returns of around 12% over the next decade thanks to its yield and growth outlook. This is very interesting coming from what is one of the safest blue chip companies in the REIT industry.
Big Yellow Group Plc (UK: BYG/OTC: BYLOF)
My favorite self-storage REIT also recently fell about 20% for no particular reason.
I think this decline was largely caused by the fact that it is perceived as a “growth” investment. It was bundled with other “growth stocks”, and that was reason enough for it to lose value.
But what the market seems to have missed is that self-storage facilities are among the best hedges against inflation and recession.
Leases are short, so you can raise rents quickly, and since people are unlikely to find a cheaper alternative to store their stuff, they are unlikely to leave their homes even during recessions. After all, it may be even cheaper to downsize your home or office and rent storage space for extra stuff if your budget is tight.
The biggest 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 much more potential in the coming decade.
Today, there is about 10 square feet of storage space per capita in the United States, but only about 1 in Europe. It’s still a relatively new concept in Europe, but its popularity is growing rapidly.
BYG is capitalizing on this insufficient supply, has little competition from other players and has a long growth streak by developing new facilities across Europe. This generates high spreads relative to its cost of capital.
We believe the company has upside potential of 25%, and beyond that it has the potential to generate annual returns of around 14% thanks to its return and growth outlook. That may sound like a lot, but it actually matches what he has achieved historically:
Coming from a recession-proof company, the risk-reward ratio is very compelling.
In times of volatility, it’s good to remember what we experienced in early 2020. The market crashed. It seemed like the end of the world was near.
Despite this, it only took 6 months for the S&P500 (SPY) and other indices to reach new all-time highs.
It’s easy to lose patience and panic when everything falls apart one day at a time. But what you should do is the exact opposite: buy long-lasting solid compounds like RICK, ARE and BYG while they are cheap. It will pay off handsomely in the long run.