SIF Folio: Gordon Dadds makes me want to break the rules

Tuesday, Jan 08 2019 by
25
SIF Folio Gordon Dadds makes me want to break the rules

In his recent NAPS folio 2019 update, Ed Croft discussed the difficulty he had including Plus500 in his 2018 NAPS folio. He admitted that his hate for the stock left him tempted to break his NAPS rules and exclude it from his 2018 portfolio.

Plus500 went on to be the biggest winner in the 2018 NAPS by a large margin.

It’s a lesson in the importance of following the rules and ignoring our monkey brain -- the emotional voice in our head that tells us not to do things we may find challenging.

I bought Plus500 for the SIF portfolio last year and felt similarly uncomfortable. But the stock went on to be one of my biggest winners in 2018, delivering a 9-month total return of 37%. This helped to offset the losses from less controversial companies which failed to perform.

The lesson learned is that if you’re investing by the rules, you have to follow the rules. The whole point of a systematic approach is that it enables us to avoid cognitive biases and act consistently.

A difficult stock to like?

All of this brings me to the company I’d like to consider this week, Gordon Dadds (LON:GOR).

This £55m AIM-listed firm has recently appeared in my SIF screen results. It’s a legal services business that’s expanded through acquisitions. This group now includes a number of specialist legal and consulting firms alongside the main Gordon Dadds business, which is described as a full-service law firm. (You can find a list of the group’s companies here.)

This group only listed in August 2017, so it doesn’t have a very long track record as a public firm. Acquisition-led growth can also be a risky strategy, especially in service businesses, where most of the assets walk out the door each night.

One final aspect of this business that I think is worth noting is that its business model is based around buying out traditional partnerships. A statement in Gordon Dadds’ recent interim results highlights some of the expected benefits of this approach for partners in acquired firms:

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Will this improve the quality of the services provided by the acquired businesses? I’m not sure. As Graham Neary asked when he covered this stock last year, if a partnership…

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Gordon Dadds Group plc, formerly Work Group plc, is a United Kingdom-based holding company. The Company provides legal, accounting, financial services, consulting and pensions advice services. The Company operates through two business segments: legal & professional services and independent financial advisory services. The Company’s services include corporate & commercial, private wealth, commercial property, litigation & dispute resolution, betting & gaming, residential property, divorce & relationship breakdown, mediation, and wills & succession planning. The Company’s subsidiaries include Culver Limited, White & Black Limited and Metcalfes Solicitors LLP. more »

LSE Price
147.5p
Change
-1.0%
Mkt Cap (£m)
42.9
P/E (fwd)
6.9
Yield (fwd)
6.0



  Is LON:GOR fundamentally strong or weak? Find out More »


21 Comments on this Article show/hide all

JohnWigg 8th Jan 2 of 21

The non-controlling equity interest in GOR's accounts is apparently in contrast to that of Gateley Holdings (LON:GTLY), where partners became shareholders and there is a profit-sharing scheme. Also Gateley Holdings (LON:GTLY) seems to have much simpler accounts. (Incidentally, Gateley Holdings (LON:GTLY) was the first UK law firm to list - in 2015).

I wonder, too, whether Gordon Dadds (LON:GOR) 's takeover of Ince & Co went altogether smoothly, as the final deal was rather different from that originally planned.
My own doubts about Gordon Dadds (LON:GOR) are based around the complexity of their accounting - and not wanting to invest where I don't understand.

Another legal company, Manolete Partners (LON:MANO) is an interesting niche business where I have taken a shareholding.

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Howard Adams 8th Jan 3 of 21

In reply to post #433653

Hi John

Yes in addition to the list in my post #1 I have a v.small holding of Manolete Partners (LON:MANO).

Regards
Howard

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Nick Ray 8th Jan 4 of 21
2

Stocko says the volatility for Gordon Dadds (LON:GOR) is 87%. That is so high it could give you a nose bleed. If you add a rule to your screen to avoid stocks with a volatility>75% (say) you can have a clean conscience (and I think the rule would serve you well for the future too! Personally I start to lose interest when the volatility is over 55%.)

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JohnEustace 8th Jan 5 of 21

I have a small holding in Gordon Dadds (LON:GOR) - I hold most of the quoted law firms. One thing that appeals to me about the sector is that business performance is pretty uncorrelated to the wider market.
Although as we are seeing in Burford, if people are selling everything then these share prices are not immune.

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leishylegs 8th Jan 6 of 21

In reply to post #433688

Hi Nick,

Excuse my ignorance but where can I find the volatility figure on Stocko that you mention?

Many thanks for your help.

Richard

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JohnWigg 8th Jan 7 of 21
2

In reply to post #433718

@ Jon Eustace - law uncorrelated? The IPO prospectus for Gateley Holdings (LON:GTLY) described how law firms suffered during the GFC. Basically there were fewer business deals to process, and actually getting paid was a big problem. (Look at overdue receivables in a law firm's accounts.) Gateley Holdings (LON:GTLY) is heavily involved in the construction sector, so may be particularly vulnerable.

A firm such as Burford Capital (LON:BUR) is a different matter, as in recessions stronger firms tend to take advantage of weaker ones, so the latter can use litigation finance in defence. And of course Manolete Partners (LON:MANO) will deal with bad behaviour on the part of directors who run their companies into the ground on purpose.

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herbie47 8th Jan 8 of 21
2

In reply to post #433643

You could also look at Juridica Investments (LON:JIL) a very similar company to Burford Capital (LON:BUR) which has just gone into liquidation, they were about the same size as Burford Capital (LON:BUR) 5 years ago.

Fairpoint (LON:FRP) also went under a while ago, they seem similar to Gordon Dadds (LON:GOR).

So I think you need to exercise some caution. Burford Capital (LON:BUR) seem to know what they are doing, it's the only one I hold in that sector, I did burn my fingers on Fairpoint (LON:FRP). I will look more into Gordon Dadds (LON:GOR).
Does a recession affect solicitors volume of business?

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Nick Ray 8th Jan 9 of 21
3

In reply to post #433748

where can I find the volatility figure on Stocko

You can add it as a column on a portfolio which includes the stock, or see it on a checklist based on a screen which includes a "1y Volatility %" rule.

For example, here is a screen which only includes a volatility rule being used as a checklist on Gordon Dadds (LON:GOR).

https://www.stockopedia.com/ch...

When you click on "more details" it shows the volatility to be 87.9

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Howard Adams 8th Jan 10 of 21
1

In reply to post #433768

Hi Herbie

One diversification against a down turn for the business revenues of the regular law firms could be the liquidation firm Manolete Partners (LON:MANO) . You can see a short introduction here if you are interested. (I hold a tiny holding).

https://www.proactiveinvestors.co.uk/companies/stocktube/11625/uk-insolvency-litigation-financing-firm-manolete-partners-begins-trading-on-aim-11625.html

Regards
Howard

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herbie47 8th Jan 11 of 21

In reply to post #433788

Hi Howard,

I do already hold a small amount of Begbies Traynor (LON:BEG) which I think will do well in a recession. I will have a look at Manolete Partners (LON:MANO) thanks.

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Howard Adams 8th Jan 12 of 21

In reply to post #433798

Hi Herbie

I'll look at Begbies Traynor (LON:BEG) as might offer a nice pairing (punt).

Thanks
Howard

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Roland Head 8th Jan 13 of 21

In reply to post #433643

Thanks Howard, for your interesting comments.

It does seem that these newer listed business models can be profitable and cash generative.

I suppose I'm wary because these firms are fairly new and are replacing a centuries-old model (partnerships) that was used for many good reasons.

Without referring to any firm in particular, I'm not yet sure if these listed businesses represent worthy innovation or something more opportunistic.

Regards,
Roland

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Roland Head 8th Jan 14 of 21
1

In reply to post #433653

Hi John,

Thanks for your comments on Gordon Dadds (LON:GOR) vs Gateley Holdings (LON:GTLY).

Gordon Dadds says that the changes to the Ince deal were made because it wouldn't have been possible to secure all the overseas regulatory approvals needed by the end of 2018. So most of Ince's international offices will operate through network sharing agreements instead of being acquired. I'm not sure what to make of this, or if it has any other implications.

But as you say, the complexity of this fast-changing business and the lack of granular detail in the firm's accounts make it hard to understand. It's ruled out for me.

Regards,

Roland

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AnonymousUser252054 8th Jan 15 of 21
1

This year’s H1 results seem to indicate that equity holders may sometimes face losses, while partners’ profit shares remain untouched... I’m sure this is all above board and correct. But it doesn’t seem a very attractive balance of risk and reward to me.

Agreed.

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Roland Head 11th Jan 17 of 21

In reply to post #435213

Thanks for flagging this up, John. It makes for interesting reading!

I suppose this news might explain the firm's rush to complete the deal by the end of 2018. It seemed a bit odd to me.

Regards,
Roland

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JohnWigg 11th Jan 18 of 21
1

In reply to post #435328

@ Roland - yes, an investment in Gordon Dadds (LON:GOR) involves a leap of faith around disclosure. Without clarity it's a speculation.

But (Hey!) the mention there of insolvency practitioners suggests a bit of work for Manolete Partners (LON:MANO) ... what other business sectors are so involved in cannibalism? (Necrophilia, even.)

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Stephen Love 18th Jan 19 of 21
2

Read the new article today on Roll on Friday about GOR's acquisition tactics and the omnipresence of administrators Quantuma: https://www.rollonfriday.com/news-content/gordon-dadds-defends-ince-administration-tactics

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Roland Head 18th Jan 20 of 21

In reply to post #437838

Thanks for flagging this up Stephen. Roll on Friday seems to have the bit between its teeth on Gordon Dadds (LON:GOR) ...

Roland

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JohnWigg 24th Jan 21 of 21
2

Raising min. £10m by a placing at 140p min:

https://www.investegate.co.uk/gordon-dadds-group--gor-/rns/proposed-placing-by-accelerated-bookbuild/201901240700059454N/

Why such a low reserve price? (Current sp 189p.) Why would they need a GM to approve? I'm really puzzled by this, and the reasons given don't entirely convince me.

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About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have an interest in (profitable) commodity stocks.  I hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  more »

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