However, despite this unreliability, it can occasionally shine a light on under-the-radar enterprises that rarely make it into the media headlines. As previously hinted, most of the time, the businesses ChatGPT recommends are tiny for a good reason. But every so often, it’s possible to stumble upon companies with promising potential.

With that in mind, I asked ChatGPT which penny stocks it thinks are the best buys in May. And after filtering out the results of companies trading above £1 and a market-cap greater than £100m, it put forward Litigation Capital Management (LSE:LIT).

So is this another wacky idea from ChatGPT? Or could it be a promising investment opportunity?

Understanding the business

Litigation Capital Management, or LCM, is certainly a unique business. Instead of investing in a portfolio of products or services, it invests in lawsuits and legal battles. Large corporations typically have their own in-house team of legal experts or have a law firm on retainer. But for small- and medium-sized businesses, that’s an expense that most can’t afford.

This is where LCM can be a powerful ally. Let’s say a rival infringes upon intellectual property or steals trade secrets. Borrowing money from a bank to fund a legal dispute in court is too risky. So instead, a small business can go to LCM to ask for funding.

After reviewing the case, if LCM thinks there’s a high chance of success, it offers to cover the costs, making the process entirely risk-free for the client. In exchange, LCM receives a chunk of the financial damages, recouping their initial investment as well as a profit.

What could go wrong?

Given LCM’s taking on most, if not all, the financial risk when investing in a litigation project, earnings can take a nasty hit should the courts rule unfavourably. There’s also the duration and liquidity risk to consider. Some lawsuits can take years before a resolution is made. During that time, any invested capital’s locked up. And with legal costs piling up, even a successful resolution may not end up being profitable.

These risks are particularly problematic for LCM’s largest four projects which currently make up half of its current investment portfolio. To be fair, this concentration issue has been slowly reduced through investment diversification. Nevertheless, it remains a prominent threat.

A good penny stock to buy?

The group’s track record of funding successful legal disputes appears to be relatively solid. However, the lumpy nature and timing of these investments can translate into periods of losses that lead to see-saw-like share price movements.

Nevertheless, litigating financing has little correlation with the broader economic market, making this penny stock an interesting way to diversify a growth portfolio. There’s no denying this is a high-risk, high-reward endeavour. But in the long run, so long as management doesn’t suffer a prolonged string of legal and financial losses, LCM appears to offer an interesting growth opportunity.

Does that make it a good penny stock to buy now? That depends on individual risk tolerance. But for those happy to hold through volatility, LCM seems worth further analysis, in my opinion.

The post ChatGPT says this penny stock’s a buy! Should investors listen? appeared first on The Twelfth Magpie.

One small-cap share I’m eyeing up for my portfolio is Litigation Capital Management (LSE:LIT). The Sydney-headquartered business provides financial and risk management services associated with the legal industry. It has a particular focus on litigation and arbitration.

The share price has skyrocketed recently following the realisation of a highly successful direct arbitration investment. With a range of legal cases awaiting judgment, I think the AIM-listed stock has potential to climb higher. Here’s why.

A big win

Litigation Capital Management generates revenue by funding costly legal actions. If the claims it invests in are successful, the company stands to benefit. It also typically charges success fees.

Such investments can be highly profitable. Recently, the firm realised a spectacular 635% return on a longstanding confidential dispute in the London Court of International Arbitration. The company secured a gross profit of nearly £31m from an initial investment of £4.8m.

Further potential

There’s more to this business than one successful dispute. The group’s indicated a series of recent resolutions will likely lead to its “strongest performance to date by a significant margin” when its full-year results are reported in September.

What’s more, the business is exposed to dozens of projects that are due to mature over the coming months and years.

The direct investment portfolio is well-diversified. It spans class actions, arbitration, commercial disputes, competition claims, insolvency, intellectual property, and more. As of 28 February, 56% of the portfolio was concentrated in EMEA and 44% in the Asia-Pacific region. This diversification helps the company to perform well across different stages of the macroeconomic cycle.

Confident in their projections, the board’s announced a dividend of 2.25p per ordinary share in September. So not only could investors potentially benefit from future share price growth, but there’s a handy amount of passive income on offer too.

Risks

Litigation and arbitration are inherently unpredictable. Although the firm has a well-qualified team of experts who conduct due diligence on the legal and financial risks, the company will inevitably invest in unsuccessful claims. Bad investments can hurt revenues and, in turn, the share price.

In addition, the company operates in a highly regulated sector. A recent UK Supreme Court judgment will have considerable consequences for the litigation finance arrangements that are enforceable in the UK.

The decision’s expected to have a “very limited or no impact” on Litigation Capital Finance, according to the company. That’s because the group structures its funding contracts using a rising multiple of invested capital over time, rather than solely calculating the return as a percentage of the court’s award.

However, there’s a risk future legal changes might pose challenges for the business model. After all, the growth in litigation financing is a relatively recent phenomenon and the company is subject to a dynamic, evolving regulatory climate.

A stock I’d buy

This penny stock offers exposure to an exciting sector. Recent successes and a solid investment portfolio point to a bright future.

Although it faces potential challenges, the risk/reward profile looks attractive to me. If I had spare cash, I’d buy today.

The post 1 soaring penny stock I’d buy today at 88p appeared first on The Twelfth Magpie.

Proven innocent

Litigation Capital Management (LSE:LIT) is a company that does what it says on the tin. The firm provides financing for businesses and individuals to pursue litigation claims. It makes money by taking a cut of any of the cash recovered from successful claims. This can be quite a chunky amount, ranging from between 15% and 40%, depending on the level of finance.

The share price is currently at 71p, having fallen 34% over the past year. However, the stock is up 42% over a broader three-year timeframe. The moves do reflect a key risk of investing in small-caps — volatility!

Fundamentally, I don’t feel the move lower over the past year is that justified. In recent months, the business has done well with cases being won. An example was the victory with Carillion against KPMG, that yielded a seven-figure sum for Litigation Capital Management.

Going forward, I think the market cap (and share price) for the business is heading higher. As a case in point, the latest results through to the middle of 2022 showed a cash figure of £41.6m. Yet the current market cap is only £86m. When I add on other assets and forecast revenue growth, I feel this won’t remain a small-cap stock in years to come.

Time for more than a pint

The second company is The City Pub Group (LSE:CPC). It owns and operates 43 pubs, mostly around the South of England. It has a solid portfolio within central London, including notable locations in places such as Paddington, Chelsea and Fulham.

The business has bounced back from the struggles of the pandemic. In comparison to H1 2021 revenue of £8.9m, the same period in 2022 yielded revenue of £26.1m. This allowed it to flip from a loss of £2m in H1 2021 to an adjusted profit of £1.3m in 2022.

In the most recent trading update for 2023, figures are running ahead of expectations. I think the outlook is rosy for the summer and beyond. The pubs are mostly in affluent areas, where the cost-of-living crisis isn’t as pronounced. This should help spending to remain elevated.

Granted, high cost inflation is a concern. The rising price of food and drink will cut profit margins, and this could drag 2023 profits down. However, I think most of this could be offset from higher revenue.

The share price is down 4% over the past year. If we get a strong summer of trading, followed by the UK economy outperforming next year, I think the share price could rise significantly. I want to buy both stocks when I have some spare cash.

The post I’ve spotted 2 small-cap stocks with big-cap potential appeared first on The Twelfth Magpie.

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. 

The post Have £5k to invest? I’m confident this stock could double your money appeared first on The Twelfth Magpie.