Burford Capital - 'the next BlackRock' or another Woodford Value Trap?

Thursday, Aug 08 2019 by
48
Burford Capital  the next BlackRock or another Woodford Value Trap

Burford is one of the largest (if not the largest) firms in litigation funding - a relatively new multibillion industry whose historically strong returns have begun to attract significant investments from pension funds, endowment trusts and the like. 

The company is popular with investors. Those looking to get a feel for the company as an investment over the past few years would do well to read through the comments over at Burford Capital - An Exception to the Stock Rank Rules?.

Coming to the stock anew, and with all the buzz of yesterday’s shorting attack, it appears that BUR is either forging a brand new, massive, lucrative financial asset class or it is conning the market. Or, possibly, a bit of both. 

A superficial glance shows some questionable cash flow statements - full of large operating outflows and frequent capital raises. I admit that I don’t know much about the economics of the nascent litigation funding industry, but I’ve yet to meet someone who does.

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The whole thing was blown wide open yesterday by the Muddy Waters short dossier.

The StockRanks are suspicious of Burford, but many subscribers are loyal long-term shareholders. Some smart people believe it is ‘the next BlackRock’ (Artem Fokin of Caro-Kann Capital, for example). Other smart people believe BUR management has been ‘egregiously misrepresenting’ economic reality (enter Muddy Waters). 

So, Burford Capital: from 120p to 2,000p in five years, and then from 2000p to 600p in twelve months. And then there’s today: down 7.3% to 559p at 11am, up an astonishing 40% by 2pm. That’s quite the ride… It reminds me, oddly, of one of the greatest opening lines ever written - from Dickens’ A Tale of Two Cities. I quote it below (because why not)?

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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Burford Capital Limited is a Guernsey-based finance and investment management company focused on law. The Company's businesses include litigation finance and risk management, asset recovery and a range of legal finance and advisory activities. It provides investment capital, investment management, financing and risk solutions with a focus on the legal sector. Its segments include provision of investment capital in connection with the underlying asset value of claims; investment management activities; provision of litigation insurance; and exploration of new initiatives related to application of capital to the legal sector until such time as those initiatives mature into full fledged independent segments. Its provision of litigation insurance segment reflects the United Kingdom and Channel Islands litigation insurance activities. more »

LSE Price
810.5p
Change
2.2%
Mkt Cap (£m)
1,772
P/E (fwd)
5.5
Yield (fwd)
1.6



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44 Comments on this Article show/hide all

herbie47 8th Aug 5 of 44
1

Why does Stocko say Burford Capital (LON:BUR) is making less profits than the year before, presume this is the 2018 year? I have seen this before and have not understood it, the EPS is going up every year.

Yet another Woodford share to go wrong.

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Gromley 8th Aug 6 of 44
3

Why does Stocko say Burford Capital (LON:BUR) is making less profits than the year before, presume this is the 2018 year? I have seen this before and have not understood it, the EPS is going up every year.
Because the actual test used in the F score is based on ROA. Earnings went up last year but not by as much as assets.
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Nick Ray 8th Aug 7 of 44
10

In reply to post #502206

They are saying that one of the weaknesses of MW's analysis is that they claim having only 4 successful cases is not a downside matter in a large portfolio of loss making ones, because the successes more than outdo the losses by many factors.

I suppose in broad terms that is right, but there is the principle of reversion of the mean, and it maybe that the somewhat disputed successes may be correct, but that is not statistically relevant to what may happen in the future, and of course ratios are inherently time bound.


Have a look at NAPS returns for any year you choose. Out of 20 shares about 2-3 will have outsized returns, about 14-16 will have middling not very exciting performance up or down, and about 2-3 will be disasters.

So in general, having most of your profit from a small number of exceptional results is a common distribution in situations like this. The problem is that you don't know which ones are going to give you the outsized returns in advance, and it does leave you exposed if you fail to snag any at all.

But once you have them, you cannot then argue that the returns would be unimpressive if they were removed. To do that argument you must remove that number of cases before you know what the results are - not afterwards!

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shanklin100 8th Aug 8 of 44
6

Jack

Interesting analysis although worth noting that BUR's interim results are yet to be loaded on to Stockopedia. No idea what that will do to any of the metrics but it would be good to be discussing up to date data.

Thank you, Martin

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herbie47 8th Aug 9 of 44
3

The SR has gone up since the results so something must have been updated? It was 10 2 weeks ago but is 28 now. Will be interesting to see what it will be when the results are added, why is it taking so long? Not sure Stockopedia did get it right all the time, the share price went from about £4 to £20 when the ranking was middling.

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herbie47 8th Aug 10 of 44
1

In reply to post #502236

Gromley, Ok thanks for explaining.

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wilkonz 9th Aug 11 of 44
2

Excellent analysis Jack. Thank you.

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RDHOWARTH 9th Aug 12 of 44
2

Burford Capital (LON:BUR) compares its returns to VC and Private Equity which is fair enough but there is a crucial difference. The latter pre-fund their investments and leave them wrapped in a single tranche of share class. That way the true cash on cash return can be tracked through the net assets. MW are basically saying its nearly impossible to track this in Burford Capital (LON:BUR) which is true. So you have unusually high returns, complex financials to say the least, a very high price to book (before the fall) and questionable governance. The only defence for Burford Capital (LON:BUR) iOS to have bullet proof accounting and therefore a bullet proof book value. Vintages of cases wrapped in a share class would achieve this but I suspect that if the returns are close to being accurate the spread across the different share classes and concentration of return in certain successes would put most people off.

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Ramridge 9th Aug 13 of 44
5

Great analysis, Jack.
Can anyone please point me to where I can find historical StockRanks for a particular share? and can they be downloaded?
Thanks

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Jack Brumby 9th Aug 14 of 44
2

In reply to post #502201

Thanks oaktree - I'm finding the historical StockRanks charts very useful in general.

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Jack Brumby 9th Aug 15 of 44
1

In reply to post #502406

Thanks Ramridge! It's a fascinating situation - I feel like I've barely scratched the surface really...

You can find the historical StockRank for a company on its StockReport page, under the share price chart (on the new site). I don't think they can be downloaded yet, but we will be improving and expanding StockRank charting capabilities going forward.

On the old site, you can click the print button on a StockReport and you can see historical StockReports (including StockRanks) that way. This will be on the new site soon, too. Hope that helps.

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Ramridge 9th Aug 16 of 44

In reply to post #502441

Thanks a lot, Jack

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23jez 9th Aug 17 of 44

I bought Bur fairly early and was pleased with the returns and the then business model which I thought I uderstood at a simplistic level. 

When they seemed to morph into a "holding company"with world wide expansion particular in America and Asia, I struggled to understand both their business model and how they managed their diverse assets So I sold  not at the top but close to; may sell the rest.

I like to think of myself as an investor not a agambler. This requires a working knowlege of its values what it does and how, as well as the financials.

23Jez

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Ramridge 9th Aug 18 of 44
18

Hi Jack

Your chart showing historical share prices against historical stockrank values got my brain ticking. As you seem to imply, is there a statistical correlation between movement of share prices and movement of stockranks? And if so, how strong is it?

I am sure you well know that statistically, one example, in this BUR, doesn't prove (or disprove) anything.

So I asked myself a slightly different question. If I take the biggest fallers over the past 5 years (the period you have chosen for your chart) and look at the corresponding historical stockranks, is there some kind of correlation emerging? A leading correlation would be good, but even a slightly lagging would not be bad.

My database goes back only 4 years. I selected all LSE shares above £100m market cap, excluding oil and mining companies and a few other groups such as investment trusts. Below is a table of the top 30 shares which have tanked more than 50% over this period.

ff9190b5ca93325fdb1de6eded62274e9b75dbcd1565355353.png

To see how these shares fared against historical stockranks, you have to go to the new website and look at the 5-year chart (to keep at least one variable constant with your analysis).

I don't have the time to do this manual exercise against each and every one of the 30 walking wounded listed above The data and method are there for those so inclined .

However here are some of those I managed to examine.

Halfords - consistent faller over 5 years. SP now only 35% of what it was 5 years ago. Yet Stockranks are solidly in the green band throughout.

61a7c72eb0bb5a266c2af77dd42ff14fab103f771565355923.png

Matks & Sparks - SP now only 47% of the value 5 years ago. Stockranks solidly in the green band throughout.

d3598b6ef33a8844982ed89f46a662d83f20d1ab1565355899.png

AA - now worth only 20% of its value 5 years back. StockRanks fell below the green band for a short period but mainly in the green band for the past 3 years.

7138ca5282e1aa1231d2c2d8578b3020420ca6901565355790.png

INDV - similar comments. What is strange in this case is the period June 2018 to now. The SP has lost over 80% in that time, and yet the StockRanks are solidly in the green zone.

e42b186348a6b7a2642a2125dd88070e77abfde31565355738.png

OK. To repeat, this still does not prove (or disprove) anything. You would need a more rigorous statistical analysis than this to draw a conclusion with confidence.

However, for me, I started with a hypothesis that there is a correlation. This sketchy piece of analysis tells me maybe there isn't. If you stare at a cloud formation long enough , you will eventually recognise the shape of familiar people or animals.

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Mike888 9th Aug 19 of 44

In reply to post #502691

Yes I have noticed this too, not by doing any specific analysis but when investigating a stock I always check the stock rank as a shorthand verifier, and occasionally you can see quite clearly that a stock is in a downtrend but the stock rank is high.

I had assumed that it was due to the period used in the momentum calculation being different to the chart I was looking at, I never bothered to check as I would never buy a falling stock even if metics and fundamentals suggested I should buy.

Interesting though....

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herbie47 9th Aug 20 of 44

In reply to post #502691

That is an interesting exercise. I knew about £INDV as often in NAPS. Another one you could add is £BON, pretty solid in the green but share price has plummetted and now suspended. I think the jury is still out on £BUR without this shorting attack then the shares would be trading around £15 probably.

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Gromley 9th Aug 21 of 44
6
They are saying that one of the weaknesses of MW's analysis is that they claim having only 4 successful cases is not a downside matter in a large portfolio of loss making ones, because the successes more than outdo the losses by many factors.


Except that is not what they are saying at all. What they actually say is :

Even using the report's more punitive approach, Burford is still producing reasonable returns:  If one were to remove (nonsensically) our best four results and all non-cash realisations, Burford's litigation finance returns would still be 33%.
(From the previous paragraph I infer that to be a ROIC number)

So in reference to (possible) reversion to mean in terms of their returns; what value would be place on Burford if they overall achieved a ROIC of 33%?

That's a genuinely open question as I don't really know the answer, but in a (perpetually?) low interest rate environment I think you would pay quite a premium for such returns.

(Disclosure : Whilst I still find this really hard to assess I have this afternoon taken a small stake here)



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shipoffrogs 9th Aug 22 of 44
3

In reply to post #502741

Gromley, I don't think it says they are achieving a ROIC of 33%.

They referenced returns of 33% - which is nicely vague, and over what period?

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Gromley 9th Aug 23 of 44
1

In reply to post #502751

It's a fair point to question that shipoffrogs (believe nothing that you cannot verify).

However if the 33% is not ROIC then I they would be being deliberately misleading.

The sentence immediately preceding the paragraph I quote was

However, just to illustrate that Burford produces desirable returns regardless, if one removes our largest gain (Petersen) from our return computations and leaves in all our losses, our portfolio ROIC would still be 59%.

So if the 'return' figure they quote following this is not also ROIC that would be lazy, imprecise or misleading language. Lawyers are not well know for the first two of those and tend to be quite careful about publicly committing the latter.

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Luthrin 9th Aug 24 of 44
8

In reply to post #502756

Hi Gromley,

Earlier today I posted a table in a comment on yesterday's SCVR which shows Burford's concluded investment returns. They're listed in order of gains, high to low, so if you simply deduct the top four from the totals at the bottom you'll see that the ROIC comes out at 33.9%. If you deduct just the top one (Petersen) then the ROIC is 59.3%.

Just as a matter of interest, I wonder what the situation looks like for most of the investors frequenting this board (assuming they have the records). In my own case, roughly 40% of my net gains over fifteen years of investing in individual stocks (as opposed to funds) have come from just three companies, and in fact the general distribution of my returns looks fairly similar to Burford's.

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