Stock in Focus: Can momentum be maintained at Burford Capital?

Tuesday, Mar 05 2019 by
Stock in Focus Can momentum be maintained at Burford Capital

Litigation financing specialist Burford Capital has been one of the most successful stock market performers of recent times. The AIM-listed firm’s share price has risen by about 1,200% in just four years. It now commands a market cap that would place it near the top of the FTSE 250.

However, Stockopedia’s algorithms have recently flagged up this stock as a potential Momentum Trap, a losing style that suggests valuation has risen far ahead of fundamentals.

There are no new stocks to add to my SIF fund this week, so instead I’ve decided to take a closer look at Burford Capital’s performance to date. I’ll be asking whether now might be a good time to take profits -- or whether this is actually the kind of stock I should be buying.

Litigation finance is hot

There seems to be no limit to the current market appetite for litigation finance. Investors seem happy to provide increasing amounts of money to firms such as Burford Capital, in the hope that its legal expertise and skilled due diligence will result in a profitable settlement in a few years’ time.

Burford remains the standout success on the UK market, but it’s growth has triggered a string of me-too flotations on AIM over the last year:

  • Manolete Partners (LON:MANO) - specialises in insolvency cases, which are said to be quicker to resolve than some other types

  • Rosenblatt (LON:RBGP) - this established law firm plans to use IPO proceeds to seed a new litigation finance division

  • Litigation Capital Management (LON:LIT) - an Australian firm that listed in December 2018

  • A fourth firm, Vannin Capital, planned to float in October 2018 but cancelled its IPO due to market volatility

It’s too soon to judge the track records of these recent arrivals. But Burford has been listed since 2009 and now commands a £3.9bn market cap. I think we should be able to learn something interesting from its numbers.

How are profits calculated?

Burford’s annual profits are based largely on estimates of the likely outcome of the legal cases in which it has invested. IFRS accounting rules specify that litigation financiers can book non-cash gains on cases, based on an independent review of the likelihood of success and the potential value of any settlement.

The problem is that these cases often take many years to resolve. So while money floods…

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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 »

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24 Comments on this Article show/hide all

JohnEustace 5th Mar 5 of 24

Burford Capital (LON:BUR) does seem to oscillate between High Flyer and Momentum Trap in the Stocko classifications. It was a Momentum Trap in June '17 at 905p until it became a High Flyer in August '17 at 1193p.
It'll be right one day.

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mojomogoz 5th Mar 6 of 24

Thank you for very well put together note

Burford Capital (LON:BUR) I'm a holder. Its a hard company to like at a detailed fundamental level and I confess I can understand more and will be doing more work. JohnEustace's comments are good. I'm not going to write much as puffed myself out on another stock recently;) ....but....

The catalyst that got me into this somewhat opaque and unconventional stock is I realised that it is a highly innovative and specialist event driven hedge par excellence. Probably better than anything we've seen in terms of 'edge' maybe except for going back to event driven pioneers who had no real competition (can't date exactly but mid 70s roughly).

Event driven hedge funds combined legal insight with financial analysis. They make returns by having a level of insight above the rest of the market in controversial situations. Its been achieved by buying in legal insight to support financial analysis. Burford have turned that on its head. They start from legal analysis (including strong network factors that others can't replicate) and screening and then overlay a financial analysis. This is so much better as it is the legal analysis that is not commoditised

If you are a 'hedge fund' with an edge that no one can really compete with then more capital is good as long as you do not become to big relative to the market opportunity. IMO more capital to Burford means more future returns (although exact amount and timing unsure)

The company tries to be as transparent as possible and seems conservative to boot in how it accounts but when I say its opaque I mean that its inherently part of the business and opportunity - can't report too openly on most cases, can't forecast wins and win rates, etc. So there's a leap of faith...I make the leap of faith as I believe it has demonstrated 'edge', they are not taking too much market share and they don't have real competition. The newbies are much more at risk from event and capital perspective.

So Burford has growth potential ahead of it and large market to grow into in which they have an ability and innovation edge. I think the company will be much bigger in 5 years time.

I expect the price to be volatile.

Their book value is greater than reported above as the funds need to be included. In many respects the funds are probably earnings enhancing rather diluting due to fee structure (Burford earn ahead of other capital providers so it leverage without risk) and the removal of a large part of capital risk generally.

The later stage cascade from European waterfall could be very impactful.

I have no clue what the results on 13 March will say nor what the price response will be. There's a chance of large movements either way based on short term sentiment factors meeting complex fundamentals.

The risk is around regulatory interference in some way. This could be govt not liking the model or legal pressure groups and industry oversight bodies getting sniffy as their other members can't play the same game

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Ramridge 5th Mar 7 of 24

In reply to post #454843

John - thanks for the link.

With respect to investments with unrealised gains, the key sentence in this explanation is this.

"Following the close of each financial reporting period, Burford’s board determines the fair values of investments after taking into account the views of management, the operation of the audit process and input from external experts (as it considers appropriate)."

I would submit that this is not an independent valuation of the open investments. It is the Board's valuations.

You are left with a choice of putting your faith in the Board of the company that they are valuing these investments conservatively and fairly. 

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gus 1065 5th Mar 8 of 24

For those interested, there is an earnings call for Burford Capital (LON:BUR) scheduled for Wednesday 13th March at 2.00pm. Details at this link.

I’ve listened in to a few of these and they’re pretty good at “opening up the black box” given the confidential nature of litigation finance. I’ve held Burford Capital (LON:BUR) for a few years and have found the level of communication from the company to be good. I’ve also contacted the CFO on a couple of questions in the past and received prompt and considered replies so a tick in the box from me on that point.

Unlike wilkonz in post #1, I was quite happy for the to raise funds when the shares hit £20 even with a placement discount given the high rates of sustainable growth they’ve been able to achieve in recent years. Surely it’s better for existing shareholders for them to raise at the top of the market than when the shares are in a trough?


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brucepackard 5th Mar 9 of 24

Hi Roland.
You said Burford had "recently" appeared as a momentum trap.
In fact, back at the start of 2017, when the share price was 623p stockopedia ranked it Q54 V16 M99
Since then it has almost trebled.
Stockopedia ranks are a great tool. But I think stocko's algo should be used with caution with a stock like Burford Capital (LON:BUR), especially for signalling when to take profits.

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JohnEustace 5th Mar 10 of 24

In reply to post #454893

That's correct. By way of backup I quote this sentence from Slide 45 of their Capital Markets presentation:
"Only two investments that were written up, amounting to 0.2% of total write-ups by dollar value, have ever turned into a loss"

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Luthrin 5th Mar 11 of 24

"As a fairly conservative investor, I feel that the ultimate measure of success for Burford will be that it returns more cash to investors than it invests each year."

That's why Berkshire Hathaway has always been such a crap investment. I mean, on paper it's made a ridiculous amount of money over the years and generated bucket loads of cash, but when you hold it to the same reporting requirements as Burford, where proceeds from investments and new investments are included in operating cash flow and not separated out into 'cash flows from investing activities', poor old Uncle Warren is caught swimming without his speedos on when the tide goes out. Just like Burford, BRK apparently has an insatiable need for capital, and the naïve suckers who put their dough into the company decades ago have yet to see a single dime in cash from their 'investment'.

Luckily for Warren, Stockopedia's algorithms give Berkshire a free pass on the cash flow calcs, otherwise it too would likely have been classified as a Momentum Trap for most of its existence.

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Nick Ray 5th Mar 12 of 24

In reply to post #454913

Burford Capital (LON:BUR) gets classified as a Momentum trap or a High Flyer depending on which side of 50 Q happens to be at the time; and Q has a habit of moving back and forth across the 50 line:

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tony mchale 5th Mar 13 of 24

Thank you Roland for an interesting article on Burford.
Burford is my largest and most profitable position in 15 years of investing.
I started building my position in Burford in March 2017 at 834p.
Stockopedia gives Burford an Operating Margin of 82%.
In 2017 Burford received 1,561 enquiries but only took on 59 cases.
Make no mistake this is a very professional firm who are No. 1 in their field.
For years Burford have surprised the market and I see this as a long term investment with potential to achieve an SP of £30.
On the few occasions I have contacted the Company I have received a speedy and professional response.
On Price to NAV Hardman & Co project 3.2x by 2020.

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brucepackard 5th Mar 14 of 24

In reply to post #454798

Thanks for that presentation @JohnEustace
I've "only" read the first 60 slides, but lots of stuff in there I didn't know already!

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tournesol 6th Mar 15 of 24

This thread is, in my opinion, a golden example of the strengths of Stockopedia and the community of investors who contribute to it. Thoughtful, insightful and well considered contributions bound into a civilised, polite and friendly discussion. What a delightful demonstration of the potential of social media (if I can label Stockopedia in that fashion) and a sharp contrast with the other sites where "investors" behave like gladiators. Unfortunately for me, most of the stocks I invest in and follow, attract little if any interest here so I am compelled to frequent the ADVFN bear pit. Some ADVFN threads (Hurricane Energy for example) are well populated by decent contributors but are also peppered with cranks and hooligans, whilst others serve as assembly points for the emotionally disturbed.

So thank you to everyone on this and other Stockopedia threads. I look forward to permanent relocation in the fullness of time.

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Ramridge 6th Mar 16 of 24

In reply to post #455123

tournesol - I concur entirely.
A light comment about the hooligans, cranks and mentally deranged who populate the ADVFN threads.
I wouldn't say they are totally a waste of space. I often go there to find light entertainment and a laugh or two. Just like a visit to the zoo. Very therapeutic.

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iwright7 6th Mar 17 of 24

In reply to post #455123


Yes I agree with you comments concerning the combined wisdom of the Stocko community - Long may it last.

I looked back at my Burford Capital (LON:BUR) notes and much to my pleasant surprise my 1st purchase was in October 2015 at 186p. Since then I bought and sold along the way and together with Bioventix they have been my best performing shares. I recall one of the brokers referring to acquisition by Burford Capital (LON:BUR) of Gerchen Keller Capital in late 2016 for $160 million as, "A Gorilla is Born" and so it has turned out to be. Great company not to be underestimated. Ian

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donald pond 6th Mar 18 of 24

Burford Capital (LON:BUR) also deserve to be commended for writing annual reports that are both informative and interesting. It isn't easy to understand exactly what they do but I take great comfort from 2 aspects in particular:
1) In the last AR they explicitly refer to Tienver and Petersen, their two biggest cases, and say that it would be a mistake to look at those cases as exceptional, because the entire nature of their business is that there is always the possibility of getting outsize gains;
2) They provide clear information on the time between an investment being made and (on average) a return being received. This is (from memory) around 2 years, and it was around 2.5-3 years ago that there was a significant ramp up in the investments BUR made. That being the case, it is reasonable to expect that the results start showing the effect of that ramp up. So my personal view is that we are in the foothills of a period of exponential growth that could last for several years, and which has also been accelerated by the acquisition of GK, the placing and the involvement of the SW fund.
I think many people who invest in Burford Capital (LON:BUR) do so as a leap of faith. I held off from £1.80 to £7.50 before investing. I hope there will be others who hold off from £18 to £75 before making the leap!

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sartingstall 6th Mar 19 of 24

In reply to post #454943

Hi Nick, how do you get the QVM rank chart over time? Regards, Steve

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Nick Ray 6th Mar 20 of 24

In reply to post #455298

It's a chart from data I've collected over time. Unfortunately Stocko do not provide the ability to plot metrics over time.

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LovelyLovelyGorgeous 6th Mar 21 of 24

In reply to post #455368

Despite numerous requests from users and vague "we are looking at it" comments from Stocko.

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WarrantStar 6th Mar 22 of 24

I think it's about time that Stocko committed to a date for the next major update which may or may not include such a feature.

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alterego 6th Mar 23 of 24

In reply to post #455233

I agree about the quality of the formal reporting from BUR. The annual report is written to be understood by shareholders not financial experts. I have rarely come across such a clear and easily understood explanation of a complex business.

I have held Burford shares for several years and added as I gained more confidence in management and future prospects. It is by now the largest component in my portfolio and keenly watched for clues as to how the vompany is performing. That’s where most people have an issue because no one is able to provide a credible forecast. The nature of the business is such that outcomes remain uncertain until resolved. Even management decline to forecast financial outcomes. Why then invest?

My reason to remain invested is that BUR has a more than decent track record of backing legal disputes that resolve in their favour. They are highly selective, not simply chasing volume at low margin. That remains key despite increasing levels of funding. It is clear that there is a significant and growing unfulfilled demand for additional funding of legal disputes and the attendant consequences, eg asset recovery post case judgement.

As Donald Pond says, there is a time lag between a given investment and its outcome. Ramping up the amount invested can reasonably be expected to produce a ramping up of profits unless BUR lose their ability to put money into winnable propositions. The recent trend away from single case finance reduces the risk of failure but may reduce the profit margin. That seems to me to be worthwhile given the growth in the amount of finance available for investment.

So it all comes down to the question, “ do you trust BUR to invest wisely?” and do you see the recent increase in the availability of additional funds continuing for years to come?

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Martin VT 13th Aug 24 of 24

With hindsight in August, this has proved to be an excellent, measured and insightful analysis Roland.

Well done.

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About Roland Head

Roland Head

I'm a private investor, analyst and writer on stock markets, with a particular fondness for free cash flow, dividends and value. My main interests are UK and US stocks. I also have an interest in (profitable) commodity stocks.  I have passed the CFA Level 1 exam and 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 and quantitative 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 very large and now defunct Canadian telecoms firm.  more »


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