After falling to a low of 600p shortly after the publication of the report, the stock rallied back up to 880p in the weeks after. However, since peaking at this level on August 15, shares in the litigation finance provider have struggled to move higher. They are currently changing hands at just under 800p.

Exchanging blows

Burford and Muddy Waters have traded blows over the past few weeks, with neither party managing to establish a lead over the other. The firm continues to claim that it has done nothing wrong. Although it has tried to clean up its image by replacing the finance director who was the CEO’s wife.

Unsurprisingly, Muddy Waters said this doesn’t go far enough. The hedge fund has also declared that it is not finished with Burford, and could have further evidence to present to the market about the firm’s business practices.

And this is what leads me to conclude that shares in the firm could fall further from current levels. The company relies on third-party financing to fund its litigation cases. Burford then takes a cut from the management of these funds. If this battle with Muddy Waters has impacted the enterprise’s ability to raise capital, then its entire business model could be under threat.

Legal action

The company is also facing pressure over its debt recovery efforts. Last month it emerged that the business had traded sexually explicit material with a third party. Burford made the trade as part of a deal to get its hands on documents relating to a judgement it is enforcing.

It has since been reported that the unidentified woman in the video is looking to pursue a case against the business. Under the revenge porn laws introduced in England and Wales in 2015, trading sexually explicit material of a person without their knowledge is illegal. Burford claims it was acting on the right side of the law, but this isn’t going to help the company’s reputation.

Too much risk

Only time will tell if all of the above will prevent it from raising additional capital and pursuing further court cases.

I’m not an investor in the shares, but if I were, I wouldn’t want to wait around to find out. At the time of writing, the stock is trading at a price-to-tangible book value of 1.4, which implies that in the worst-case scenario, the shares could be worth 566p or less, around 30% below current levels.

That’s assuming that the figures on the balance sheet are reliable. Muddy Waters claims they are not. If that is the case, the potential downside could be substantially higher than the published tangible book figure.

So, that’s why I think the Burford Capital share price could fall another 30% from current levels. In my opinion, it is so difficult to tell what the future holds for the company from here.

As a result, even though the stock could double from current levels if it returned to its historical average P/E of 11.5, I think there’s just too much uncertainty surrounding the future of the business.

The post Warning! I think the Burford Capital share price could fall another 30% appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

At the beginning of August, the company had a market capitalisation of £3bn, but this has since crumbled to £1.8bn following Muddy Waters’ attack. 

Muddy Waters initially claimed that Burford’s accounting and governance practices are all wrong, and the company could be insolvent based on its analysis of the accounts. Soon after the report was released, Burford fired back. The litigation finance provider issued a rebuttal document disputing all of the claims against the hedge fund and threatening legal action. 

In the days since, Burford has intensified its attack against Muddy Waters. On August 12, the firm issued a news release saying that after conducting a “forensic examination” of trading data from August 6 and 7 — the days when Muddy Waters published its dossier — there was evidence of “trading activity consistent with material illegal activity.” Muddy Waters immediately refuted these claims.

Posting on Twitter, the hedge fund wrote that it has “absolutely no trading capability” to make the kind of market manipulating trades alleged. It also called the accusations “preposterous” and promised to “smack” Burford down hard if the firm brings this evidence to court.

With Burford and Muddy Waters both digging in, it doesn’t look as if this spat is going to end any time soon.

Two choices 

The way I see it, investors have two options here. They can either stick with Burford or sell the shares. The question is, if you stick with the firm, how low can the stock go before staging a recovery?

The answer to this question isn’t simple. In reality, any share can fall to zero if the underlying company goes bankrupt. Muddy Waters claims that Burford is insolvent, but the company disputes this.

Burford might claim to be solvent, but the company has historically relied heavily on third-party finance to fund its operations and provide capital. For example, during the first half of 2019, the company recorded $751m of new investment commitments from investors, and this is where problems could now emerge.

Third party confidence 

Muddy Waters’ attack on the company has undoubtedly shaken investor confidence, which might make it harder for Burford to raise capital going forward. 

Unfortunately, the longer the fight between the two parties continues, the more likely it is that investors will avoid the firm. The one thing the market hates is uncertainty, and if Burford does take Muddy Waters to court, I think investors will sit back and wait for an outcome before committing new capital to the business.

This could have a severe impact on Burford, but at this point, it is impossible to tell how much of an impact.

So overall, while it seems unlikely that the firm is insolvent right now, the company’s operations are likely to be hurt substantially by the short attack. 

Only time will tell if the business will be able to recover from this reputational damage. With so much uncertainty surrounding the business, I think it is probably best for investors to sit on the sidelines here and watch the battle between Burford and Muddy Waters play out. 

The post How low can the Burford Capital share price go? appeared first on The Twelfth Magpie.

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The report accuses Burford’s management of manipulating the figures, misleading investors and colluding with Neil Woodford’s protégé Mark Barnett to juice the returns on its litigation investments. Muddy Waters concludes that, based on its research, the firm is facing liquidity problems and could be insolvent.

A tower of cards 

Yesterday, Muddy Waters revealed that it was planning to publish a short report on a UK-listed business this morning. Rumours quickly spread through the market that the target was Burford and the stock started to slide. 

Management decided to preempt the report by issuing their own statement this morning. In the statement, the company declared “Burford’s cash position and access to liquidity is strong” and “our litigation finance returns rose to their highest-ever levels as of 30 June 2019.“

Burford’s update also noted that the company “uses the same IFRS accounting that is used widely across the financial services industry and has used consistent accounting policies for many years.” 

Muddy Waters disputes all of these claims. In its report, the research outfit claims that Burford is “a poor business masquerading as a great one,” and the firm “woos” investors with “non-IFRS metrics,” which are “meaningless.” The report goes on to state:

“We have identified seven techniques through which Burford manipulates its metrics to create what we believe is an egregiously misleading picture of its investment returns. These manipulations usually involve Burford either giving itself credit for a recovery when one is uncertain (or even highly unlikely) or ignoring cases that are likely to be failures.”

Furthermore, Muddy Waters has reviewed Burford’s published financial metrics and believes it is “financially fragile.” The company’s “operating expenses, financing costs, debt, and funding commitments,” put the business at “a high risk of a liquidity crunch,” it states. The report goes on to speculate it is possible the enterprise is already insolvent.

Time to catch a falling knife?

Considering all of the above, it is no surprise that investors have rushed to sell Burford following the report from Muddy Waters. If the allegations turn out to be correct, then the stock could be worth nothing. 

At this stage, we do not know if there is any truth to these allegations of insolvency and accounting manipulation. However, Muddy Waters has presented compelling evidence suggesting that Burford has been manipulating recovery figures, in particular. This is enough, in my opinion, to sell the shares.

The problem is, as investors, we have only have a limited view of a company’s financials and operating performance. We have no choice but to take what management says at face value. If we cannot trust management, then that is a big red flag in my mind. With this being the case, I think Burford needs to prove that the accusations are incorrect before trust is restored and it is better for investors to err on the side of caution here. 

All in all, I think it is best to avoid the shares even though they might look undervalued after falling 60% in two days.

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The way I see it, there have been two main reasons why the stock has performed so strongly since 2014. First of all, Burford has benefited from the first mover advantage and secondly, the litigation finance industry is booming. 

Because Burford has one of the highest profiles in the sector, it has been able to capitalise on the industry’s rapid growth. Indeed, in December, the company announced that it had received funding from an unnamed sovereign wealth fund along with a selection of other high net worth and institutional investors who contributed a total of $1.6bn in new investments.

Further growth ahead 

With these tailwinds behind the company, I do not think it is unreasonable to say Burford’s growth is only just getting started. 

City analysts believe earnings per share will increase by nearly a third between 2018 to 2020, which puts the stock on a forward P/E of 11.3 and gives it a PEG ratio of 0.4, implying shares in Burford are undervalued compared to its growth potential.

Another company that has recently sprung up in the litigation finance sector is Litigation Capital Management (LSE: LIT). With a market capitalisation of only £100m at the time of writing, compared to Burford’s £3.6bn, the business is a tiddler compared to its larger peer.

However, if the firm can replicate Burford’s success, I think investors could double or even triple their money with this enterprise over the next few years.

Double your money 

Litigation Finance is only small, but its earnings are multiplying. For the six months ended 31 December 2018, its numbers show an 181% increase in revenues and a 268% increase in adjusted profit before tax. The total value of capital deployed in litigation investments increased by 96% to A$12.8m. Cash receipts from the completion of litigation investments hit A$11m, up 10,768% year-on-year. 

To help complement growth, this week the company announced that it has signed a cooperation agreement with a major global law firm, which, according to Litigation’s management, puts the business in a “prime position to finance disputes undertaken by the law firm and its clients.“

Unfortunately, Litigation Finance is not currently covered by City analysts, which makes the business slightly tricky to value.

Nevertheless, looking at the company’s fiscal first-half performance, I estimate the group is on track to earn around 4.52p for its current financial year — this is a conservative forecast as it assumes profits will remain flat throughout the last six months of the firm’s financial year. With earnings per share up more than 200%, I think a P/E of around 20 is suitable for this business. 

Based on this estimate, I reckon the stock is worth around 90p. If earnings per share continue to grow at 100% to 200% per annum, it could be worth 180p to 260p in the near future. 

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The company is trying to turn itself around, but it’s not been easy. Allied invests in early-stage tech and biotech businesses, two markets where it notoriously difficult to pick winners. 

However, management is hoping that 2019 will be the year that the group’s portfolio starts to yield results. In a trading update today, CEO Jill Smith reports that three of the firm’s largest investments, Spin Memory, HawkEye 360, and Federated Wireless are “on track to deliver commercial revenue in 2019.“

The CEO also set out to reassure investors that the business is well-funded for the foreseeable future, reporting Allied “had a cash balance at 31 December 2018 estimated at $50m.” Smith goes on to note that this figure includes additional capital contributions to SciFluor and Precision Biopsy, which were both supported by Woodford Investment Management.

Time to buy? 

Today’s update shows that Allied is trying to put its mistakes behind it, but I’m not a buyer at the current level. 

I’ve always been sceptical about Allied’s potential because I know how difficult it is to pick successful startups. So far, the company hasn’t proved to investors it can succeed where so many other funds have failed. For this reason, I’m staying away. 

On the other hand, I would happily invest my money in another Neil Woodford favourite, Burford Captial (LSE: BUR). 

Booming market 

Unlike Allied, Burford has an impressive track record of creating wealth for its shareholders. Investors who bought the stock five years ago have seen the value of their funds grow by 74% per annum. 

It doesn’t look as if the business is planning to slow down anytime soon. The booming market for litigation finance is proving to be a fertile environment for Burford to grow and expand. 

According to a recent survey of nearly 500 lawyers around the world conducted by the firm, 70% of respondents who don’t already use litigation finance say they’re likely to do so in the next two years. Meanwhile, just under two-thirds of interviewees cited Burford as the best provider of litigation finance in the field. 

All types of investors are trying to get in on the litigation finance market, where returns tend to be significantly higher than other asset classes. Back in December, Burford announced it had secured funding for $1.6bn in new litigation investments. A sovereign wealth fund and new private investment fund made up the bulk of these contributions, with the company’s cash filling in the rest. 

City analysts believe the company’s earnings per share could grow 21% by the end of 2019. That puts the stock on a forward P/E ratio of 16.5 and gives a PEG ratio of 0.5, which implies the shares offer growth at a reasonable price. That’s a valuation I think is worth snapping up today.

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According to the group, the funding will help HawkEye cover the “build and launch costs of the company’s first commercial satellite cluster and for general commercial purposes.” 

The HawkEye follow-on round is just the latest investment for Allied Minds. Earlier this year the company also made two new investments in TableUp and Orbital Sidekick, a software provider to the restaurant industry and analytics firm respectively. 

These new ventures seem to be part of management’s plan to turn Allied’s performance around. Last year the group crashed out of the FTSE 250 after revealing pre-tax losses of $58.2m on revenues of $2m during the first six months of 2017. These losses followed the $146.6m writedown on the value of seven of its portfolio businesses and a £64m cash call. 

Poor record 

Allied Minds is a venture capital business. The group invests in early-stage businesses, mainly in the tech and MedTech space, hoping to generate a huge profit when these firms reach maturity and are bought out or list via an IPO. 

Unfortunately, Allied’s track record of investing is poor. So far, there have been no windfall profits from IPOs or business sales. 

With this being the case, even though Neil Woodford continues to support the business, I’m staying away. There are many other companies out there with a better record of producing returns for investors, such as Burford Capital (LSE: BUR). 

Industry leader 

Burford is one of Woodford’s top five holdings in his flagship Equity Income fund, and it is easy to see why. A few years ago, litigation finance, which Burford provides, was virtually unheard of as an asset class. However today, the litigation finance industry is booming and Burford is leading the market. 

Litigation finance is an exciting asset class. Financers help fund the cost of legal action in return for a share in any award made by the court. These returns can be enormous. For example, a few months ago Burford told shareholders that, at the conclusion of one legal dispute between a Spanish company and the government of Argentina, it had generated a return on investment of more than 700% over seven years. Institutional investors are queuing up for this kind of exposure. 

That said, while returns can be higher, it requires experience to be able to navigate the industry successfully. Burford has this experience, which is why growth has exploded over the past five years. 

Net profit more than doubled to $265m year-on-year for the 12 months to the end of December last year. In 2012, for the year as a whole, Burford’s net profit was just $17m. 

With growth exploding, I’m excited about Burford’s future. I believe both the demand and supply of litigation finance will only grow and Burford is in a prime position to continue to profit from surging investor demand. 

Shares in the company are currently trading at a forward P/E of 19, which is slightly higher than the companies I’d usually invest in, but I believe the multiple is appropriate for a business that has grown EPS at a rate of 70% per annum for the past five years.

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Unfortunately, in recent years this approach has not paid off and several high profile failures have dented his reputation.

However, while the press has focused on the failures, he’s had some tremendous successes as well, which analysts seem to be overlooking.

Record performance 

Burford Capital (LSE: BUR) for example is one of the top five holdings in the LF Woodford Equity Income fund. Over the past five years, this provider of litigation finance has produced a return for investors of 1,332% excluding dividends. Over the past 12 months, including dividends, the stock has returned 80%.

And it looks as if Burford’s growth is only just getting started. Last week the company reported it had managed to more than double income and profit in 2017 and “persistent demand” for its services led to “record new investment commitments” of $1.3bn, “sowing seeds for future profits.” What’s more, even though it’s only a few months old, 2018 is shaping up to be another exciting period for the group. According to last week’s market update, $129m of capital has already been committed to 12 new investments during the first two months of 2018, compared to one single $1m investment in the same period last year.

In my opinion, this activity implies that the company is on track to smash City expectations for growth this year. After 2017’s record performance, analysts are expecting earnings per share to slide by 30% to $0.84 (60p) for 2018. But with the firm looking as if it can break another income record this year, it seems to me as if these forecasts are a tad conservative. 

Analysts have already hiked their earnings targets by 12% over the past month. With this being the case, Burford’s forward P/E of 22.4 does not seem too demanding.

The market’s best company? 

Another Neil Woodford growth stock I’m considering for my ISA is motor claims accident management service business Redde (LSE: REDD).

Redde is a tremendous growth stock. Over the past five years, shares in the company have produced a total return of 42% per annum, making them one of the best performing investments in the entire London market.

The performance is a result of a combination of both earnings growth and multiple expansion. Over the past five years, revenue has doubled as the company has moved from a lossmaking position to an estimated net profit of £36m as expected by City analysts for fiscal 2018. Off the back of this projection, analysts expect the group to earn 11.9p per share for 2018, giving a forward P/E of 14.2. 

Given the fact that growth is expected to slow during 2019 (net profit growth of 6.4% projected) this valuation is a bit on the expensive side. Nevertheless, the company currently pays out all of its earnings to investors via dividends, which means today the shares are trading at a forward dividend yield of 7%, more than double the broader market average. This yield is the primary reason why Redde looks attractive to me.

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Since mid-2015, shares in the business have lost around 50% of their value, thanks to sluggish trading, although it now looks as if this cloud overhanging the company is starting to dissipate. 

According to a trading update published by the firm today, covering the 13-week period to 30 December, like-for-like revenues for the first start of the current financial year increased by 3.4%, compared to growth of just 0.3% for the previous year. 

According to Matthew Williams, this growth, which is higher than the rest of the market, “reflects the continued success of our strategy of ‘Out-specialising the Specialists’,” a scheme devised by management to offer completely different tiles in Topps’ stores than the rest of the market. According to management, differentiated products now account for almost 90% of tile sales. 

Opportunities for growth 

As well as offering a unique product set, Topps is also developing a new division targeting the commercial tile market. To complement growth in this division, the group acquired Parkside Ceramics in September. According to today’s update, the “Parkside commercial offer was launched at the 100% Design trade show in October,” and the enlarged company’s first commercial showroom opened in Chelsea in December.

The benefits of this expansion into the commercial market should start to trickle into group results over 2018. If trading figures for the company’s first quarter are anything to go by, then it’s going to be a good overall year for the firm. City analysts are currently expecting revenue growth of 3.3% for the full year but earnings are expected to slide 8% on higher levels of investment. Pre-tax profit is projected to tick higher by a few hundred thousand pounds. 

And considering Topps’ valuation, there’s room for considerable upside in the shares if the group beats expectations. The shares currently trade at a forward P/E of 11.5 and yield 4.5%, so are both cheap and offer a market-beating dividend yield. 

High demand 

Over the past five years, shares in litigation finance provider Burford Capital (LSE: BUR) have returned more than 1,000% excluding dividends. 

The shares have been able to smash the market thanks to the business’s underlying growth. As it turns out, providing litigation finance, and managing funds for those wanting to invest in such instruments is a lucrative business. For 2017, City analysts are expecting the firm to book a pre-tax profit of $164m on revenue on $227m, a pre-tax profit margin of 72%. 

Unfortunately, for 2018 analysts are expecting Burford’s growth to slow but I don’t believe that this will hold back the shares. Earnings per share are expected to slide by 28% from 76p for 2017, to 55p for 2018. 

There is some uncertainty around the predictability of Burford’s earnings, so this figure could be revised higher throughout the year. It’s clear the company is the industry leader in its field, and if first-half 2017 numbers are anything to go by, investors are queuing up to invest in the business. Indeed, during the period, Burford’s new investment management business closed the most substantial investment fund ever raised within the sector, at $500m, to invest in sophisticated strategies. 

Still, despite the company’s bright outlook and leading position, the shares look a bit expensive at a forward P/E 14.8 times forward earning 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A slowdown in transactions has hit estate agencies hard with likes of Foxtons and Countrywide losing more than a quarter of their value over the past 12 months. However, international property remains a highly desirable asset for investors and Savills (LSE: SVS) is one of the most trusted names in the business.

Today the company reported its results for the half year ending 30 June 2017, revealing a 15% increase in overall group revenues and 12% increase in underlying profits. Group profit before tax increased 27% year-on-year and underlying basic earnings per share rose 18% to 25.7p. Revenue expanded across all divisions with the group’s investment management arm showing the strongest growth, reporting a revenue increase of 22%. Property management revenue and consultancy revenue grew 13% and 15% respectively. Transaction revenue rose 15% reflecting “strong performances in Asia, Europe and the UK Commercial market offsetting a slight decline in UK Residential revenue.”

Sector champion 

Savills is a standout performer in the UK property industry. As other companies have suffered, shares in the group have added 36% excluding dividends over the past 12 months. 

Management is looking to expand the firm’s presence overseas, to reduce the dependence on UK markets, recently acquiring Spanish real estate advisory firm Aguirre Newman SA for €67m. 

Property is a relatively safe asset and Savills’ reputation, coupled with the company’s international presence gives it a safe, defensive nature. Based on current City estimates for the full year, shares in the property group are currently trading at a forward P/E of 13.6, falling to 12.8 for 2018, and support a dividend yield of 3.3%.

Explosive growth 

If Savills is not for you, Burford Capital (LSE: BUR) has some hallmarks of another relatively ‘safe’ growth investment for your portfolio. 

Burford is a finance and investment management firm focused on law. Offering litigation around finance, risk management and asset recovery, the company operates in an ever-growing legal services market where profit margins are wide, and returns are almost guaranteed. The firm recently reported its best ever first half, with profit for the period exceeding that of the full year 2016. 

Operating profit rose 151% for the period, and pre-tax profit leapt 170%. Also, Burford’s record of being able to achieve steady returns for investors in its credit-based funds helped the company win record levels of new commitments for investments of $488m. 

It’s hard to believe that just eight years ago Burford was a startup worth only £80m. Today, the group has a market capitalisation of £2.3bn. For the full year, City analysts have pencilled in earnings per share growth of 70% to 68.8p and based on this, shares in the company are trading at a forward P/E of 13.3, a multiple that seems to undervalue Burford’s prospects. 

The one downside is that the shares only support a dividend yield of 1%, but as the payout is covered more than seven times by earnings per share, I would not rule out further dividend growth in the years ahead.

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• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.