Burford Capital - 'the next BlackRock' or another Woodford Value Trap?
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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.
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 way..."
Only a master writer could start a story so audaciously, with such confidence and verve. The sentence is all-encompassing… It stretches out across the entire medley of human experience, into every nook and cranny, hits every shadow and shaft of light.
After recent events, Burford shareholders, too, must have experienced a similarly exhilarating ride through the highs and lows of human emotion.
A brief recap on Burford events
A quick trawl through the RNS releases shows a clear pattern of selling from Invesco and Woodford over the past 2-3 years. This might be totally innocent profit-taking following some pretty stratospheric share price appreciation, but it is interesting nevertheless:
18 October 2017 - Invesco sells, taking its stake from 23.97% to 22.72%
18 January 2018 - Invesco sells, taking its stake from 22.72% to 21.99%
14 February 2018 - Invesco sells, taking its stake from 21.99% to 20.99%
06 March 2018 - Invesco sells, taking its stake from 20.99% to 19.79%
23 April 2018 - Invesco sells, bringing its stake down from 19.79% to 17.78%
25 July 2018 - Woodford Investment Management sells, bringing stake down from 10.13% to 9.43%
07 August 2018 - Invesco sells, bringing its stake down from 17.78% to 16.95%
05 October 2018 - Invesco sells, bringing its stake down from 16.95% to 15.34%
04 January 2019 - Invesco sells, taking stake from 15.34% to 14.99%
24 June 2019 - US court denies Peterson hearing
30 July 2019 - BUR H1 2019 results released. Stock trades sideways despite a 36% increase in profit after tax and sell-side research praising ‘another excellent set of figures’
07 August 2019 - Statement re Share Price Movement - BUR notes the ‘rumour of a potential "short attack" or "bear raid",’ and goes on the offensive, adding:
‘There is a clear line between appropriate commentary and market manipulation, and Burford is investigating, with the assistance of market experts and experienced outside litigation counsel, the market activities here and will take appropriate legal action should we discover actionable misconduct. We are strongly suspicious that yesterday's significant fall in the share price was based on such actionable misconduct.
‘Short sellers of this ilk are not long-term investors. Rather, their goal is to panic investors into selling their holdings and thereby to drive down the share price. If investors oblige them, then the attack succeeds, long-term investors are harmed and the short sellers pocket a quick payday.’
07 August 2019 - Muddy Waters releases its Burford short dossier, claiming that 'thanks to a light disclosure regime, the esoteric nature of its business, and unethical behavior by its largest shareholder, Invesco, it [Burford] turned Enron-esque mark-to-model accounting into the biggest stock promotion on the AIMBUR has been egregiously misrepresenting its ROIC and IRRs, as well as the state of its overall business.'
07 August 2019 - BUR acknowledges the Muddy Waters dossier: Statement re US Research Firm Document
07 August 2019 - Report Critique Meritless, Principals to Buy Stock - ‘Burford will issue a detailed response to the report as soon as practicable and, following that detailed response, will also convene an investor conference call, as to which participation details will be provided in due course.’ adding that ‘Christopher Bogart and Jonathan Molot, Burford's Chief Executive Officer and Chief Investment Officer… each intend to purchase Burford shares for their personal accounts.’
08 August 2019 - Burford's Response to Short Attack
Burford has come out guns blazing, clearly. Nevertheless, the facts don’t lie: since the start of this week, BUR’s share price has fallen by nearly 60% and is down another 5% today.
How negative surprises destroy momentum
A couple of years ago we did some great research into profit warnings and subsequent share price trends. Although the Muddy Waters dossier does not constitute a profit warning, it is similar insofar as a sudden shift in market perceptions has led to a substantial 1-2 day share price hit.
This research looked at 245 Profit Warnings gathered between January 2013 and August 2016 and found that this was the average share price reaction in the wake of a PW:
The chart shows that, on average, a PW is followed by at least a year of middling to negative momentum. Even if Burford management can respond robustly, the cat’s out of the bag. The question has been asked and the doubts have been raised. Perceptions have changed and buyers and sellers on the margin will respond accordingly.
Here’s a more detailed view of share price performance in the 18 months after a profit warning:
Certainly, Burford’s momentum metrics don’t make for happy reading:
Has Burford been an exception to the StockRanks?
BUR is another example of a growth stock with a StockRank that doesn’t always play along with said company’s enthusiastic investor base. There's been an ongoing belief that the StockRanks have always been 'wrong' for Burford Capital. One of the nice things on the new site is the StockRank history.
Here's the BUR share price chart, with the StockRank underlaid. You can see that the StockRanks have called Burford well at pretty much every turn - from undervalued growth prospect to middling value and then faltering progress:
The StockRank was 80+ between 2014 and mid 2016, reaching as high as 95 in January 2015. So BUR was well flagged by the StockRanks. The SR then dropped gradually over the next few years, and currently stands at 25 after yesterday’s short dossier.
Where this goes next is up to the market to decide and, considering today’s remarkable intraday trading (it has fallen 14% in the last 30 minutes but remains up 19% since the start of the day), it appears as though the market is not yet ready to make up its mind... If marginal holders have been suitably shaken, though, selling pressure might take a while to unwind.
The StockRanks are, of course, just statistical measures. They are not always right - but they are more often right than wrong.
A word on valuation
As things stand now, in a post-Muddy world, BUR is a bet on your beliefs - either this is a hot air story stock that deceives the market, or it really is the next big thing.
Either way, the share price will not remain at these levels. It will shift dramatically, one way or the other - as seen in today’s remarkable intraday trading. If it really is the dominant market leader of the next big financial asset class - aka BlackRock circa 1995 - it should be at a substantial premium to NAV.
If not, and the economics of litigation finance are not as amazing or its future is not as secure as was once thought, then there should be a discount to account for that. Right now BUR says its net assets are $1.57bn. With shares in issue of 218,649,877, that makes for NAV of around $7. The current share price (which is jumping around all over the place and making my life a nightmare) of 805p at a £/$ exchange rate of 1/1.21 equals $9.74.
A target price of NAV would be something like $7 / 1.21 = c580p.
A lot of it depends on what kind of multiple this company deserves, and that is open to interpretation. On the one hand, it is the leader in litigation financing and its rivals do not come close in terms of scale or reach. On the other hand, a lot of Burford’s remarkable rates of returns have been generated from just four large cases and serious questions have now been raised about the authenticity of said returns.
Burford Capital: just another speculative Woodford stock?
Another interesting angle to this saga is the Woodford / Invesco angle. With Woodford fundholders now locked in until December at least, seeing one of the former star’s few successes stumble so spectacularly must be concerning, to say the least. Are there any other investments currently defying gravity, preparing to fall to earth? We are working on some research in this area now and should have more to show in the coming weeks and months.
Woodford continues to hold other companies with interesting economics such as IP Group, which invests in private, start-up, speculative story stocks as a matter of course. The market has so far valued it accordingly:
It makes you wonder if there are any other skeletons in the closet.
Either way, with regards to Burford and however this all ultimately plays out, we can see that the quantitative measures really were telling us something - and not just in terms of StockRank. Here is a graph of the group’s Piotroski F-Score over time, courtesy of our intern Zoe:
And today’s breakdown of Burford’s financial health trends:
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About Jack Brumby
I'm looking for compounding investments.
I started off in Leisure - a part of the market I still love, but an area where stocks can appear "cheap" for years without going anywhere. It made me realise that valuation is only one part of the puzzle.
Now I sift through a much broader universe of stocks in search of small, high quality operators with large addressable markets, strong and maintainable margins, and clear share price catalysts.
CFA charterholder.
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That would be true but NAPS has operated in a bull market for most of its existence, so relatively high performance may be time bound.
Also, whilst it may be true that in a wide enough portfolio some elements will always outperform others is likely to be true, that neither makes its a profitable or high performing portfolio. It maybe with decent diversity, and a decent spread of stocks, it will perform better than some other portfolios, but the case is not proven that a Naps style portfolio leads consistently leads to exceptional performance, which is essentially what Burford Capital (LON:BUR) are claiming.
Would love to see graphs like the above for the aftermath of previous "buy a short position publish a dossier" attacks... Quindell. Globo. Paysafe. Plus500. Blinkx. Would also like to see Burford successfully sue the perpetrators, it really seems so unfair!
Profits at Burford simply do not turn into cash,.as the article points out. That's one of numerous red flags around this company - peculiar corporate governance, listed on AIM, registered in Guernsey, lumpy revenues, accounts not prudent, etc, etc. See https://roliscon.blog/2019/08/12/burford-illegal-market-manipulation/ for details. Glad I never invested in it.
Very interesting... In future, we should be able to disaggregate the various Ranks to get a more detailed picture. One point I would propose is that as momentum declines at these various companies, 'value' increases, and so the balance of factors supporting the overall StockRank must shift. This is just my assumption, but the share price decline might be pushing the earnings yield, dividend yield, price-to-book etc. measures up.
In terms of StockRank Styles, it might be something like going from a Super Stock to a Falling Star to a Contrarian or Turnaround stock?
Either way, a worthwhile exercise and a good reminder of why a portfolio of high StockRanks is more robust than a single high StockRank.
One point I would propose is that as momentum declines at these various companies, 'value' increases, and so the balance of factors supporting the overall StockRank must shift.
As I understand it the StockRank is average of the three component ranks, re-ranked. Taking the product of the individual components, prior to re-ranking would produce a different overall ranking, favoring companies which are strong (or average) on all three measures. Or one can just screen for these ... but it does suggest that you'll need to reduce some thresholds (>90 in the components produces one UK candidate).
Really interesting post – the correlation between moves in SR and SP.
Of course the SR of a single stock does not indicate it’s SP success – all members know that we need a basket of high SR stocks to have a relatively successful portfolio. Similarly, you looked at four of your 30 stocks and, as you said, you need to analyse all or at least most 30 to cement your point.
I believe the weakest member of the factors that make up the SR is Momentum. Attempting to arrive at a Momentum number for a stock (as Stocko has to for a SR number) is difficult anyway but added to that is that everyone’s idea of SP momentum is different and everyone’s time-horizon is different. Sentiment is a key factor in SP moves and is only partly represented by Momentum.
Anyway, Long Live SRs! They are what they are and are never “wrong”, just sometimes misunderstood!
Thanks again for your post, Ramridge. You have certainly got us thinking.
Shorting should be outlawed! The perpetrators should be severely punished and their “wealth” used to compensate the losers
Shorting should be outlawed! The perpetrators should be severely punished and their “wealth” used to compensate the losers
Predatory shorting, based on a false narrative should be outlawed. So should using accounts to create a false narrative. It is? Probably should be some balance introduced then.
Otherwise shorters can help expose dubious practices, encourage positive change and ensure that new investors don't overpay; this surely helps with future capital allocation at a macro level.
Personally, I don't short, but I would be wary of any company with a large short interest as shorters play a risky game. It would be a nice flag for Stocko to incorporate ...
The flurry of Burford Capital (LON:BUR) RNS addresses some of the concerns raised by MW. The actions deserve praise.
They also indicate the value that can arise from a short report.
Caro-Kann Capital has issued a detailed rebuttal of the Muddy Waters case:
“The hardest thing of all is to find a black cat in a dark room, especially if there is no cat.”
Found this report quite interesting. Maybe worth watching this company. Our Club did hold this share but lucky for us we sold before the fall
For anyone interested Carson Block has now 'pranked' Burford - not sure what his motivation is other than to massage his "rock star" ego.
This was covered by FTAlphaville (free registration required) or you can view the video on youtube here
Copy and paste of my comment on bag prank on Burford FWIW...
The circus undermines Muddy Waters more than Burford. It’s juvenile. There’s a lot of grey in the accountants of Burford and governance unbecoming-ness for sure...but its the story of AIM too partly and the lighter touch for that market does have a role and value too.
if you’re sure as a short seller that you’re short gun fires fundamentally and not purely as a (highly successful) short "opportunistic" trade then why the cheap tricks. It’s a bit like Block’s ego has been hurt by the counterpunch from Burford. Whatever he does now (cover or add ahead of results) he’s going to seem like a bit off IMO...either he's taking the Michael out of existing shareholders or he's like a psycho cat toying with a half dead mouse.
My guess is that Block’s insight on Burford doesn’t go much beyond negative innuendo on valuation and cash return horizon plus quantum of uncertain litigation assets. But it was beautifully timed and executed innuendo with well choreographed theatre in already unsettled markets for a stock with a lot of weak hands (Woodford and many retail punters riding the momentum of earlier success and then jumping in following mates) and general doubts about the right value for a big case (that they really can't say too much about!). The whole Muddy Waters case is a nudge and wink rather than a revelation...very carefully sticking to safe side legally as they do not have the evidence to repulse a challenge or at very least embarrass Burford if legally challenged (anyone motivated who had read BUR disclosures fully could have created most of report if they wanted to look on the dark side of motives and valuation).
I’ve been fortunate enough to meet many great fundamental short sellers and if they go public on a stock then they do have the smoking gun and are willing to step over the innuendo line into clear accusation. The MW style is patsy by comparison and a bit of an embarrassment to old skool players - kind of reality TV notoriety rather than the real deal. Uncertainties and misgivings are so well disclosed around Burford now that I would expect fundamental short sellers to be in on the stock more if the case was stronger and clearer.
BUR is like a Schrödinger's cat market experiment. We won’t know whether it’s dead or alive until the reveal takes place (it’s obvs a series of reveals!). On balance I think BUR win the reveal game overall and for that reason I took a position. Who knows how the next few reveals work out though so I don't have a full position. Very simplistic case:
1) At today’s price Petersen is mainly all upside if it proves out reasonably well.
2) even if they do pay themselves generously it’s unlikely to outrun case returns
3) law ain’t going out of business and it seems quite probable that BUR invented a better mousetrap for running the litigation game...
4)...a source of business and growth that does likely provide advantage over others and an ability to create new business that wouldn’t exist without their mousetrap
5) cynically....capital market players will love BUR as it’s a business that will generate ongoing fees and opportunities (eg for sure it’s going to be looking for more growth capital when clean)...so these important cogs in machine will do what they can to rehabilitate BUR rather than let it rot under weight of innuendo
6) Burford is the ultimate event driven hedge fund. It starts with an analytical and decision making legal angle in its investment decision making that competitors cannot match (particularly if financially orientated).
In the meantime expect gaps and excitement as the future unrolls. The main dilemma facing Burford today (assuming MW case doesn't stick) is whether its a growth company or not. To grow it needs external capital (just like a bank would if it could not generate so much of its own funds). If funding isn't open then valuation will not get too high and the growth runway will be much slower as its funded from internal cash. If you approximately believe the Burford case then you should fund them!
(Note: On 5, I’m curious about the RNS yesterday saying Morgan Stanley took 6% position. New CFO, who CEO isn’t literally sleeping with, is Burford’s ex MS handler).
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Tom W is reporting a rumour that Gotham City are going to publish their own Short Dossier on Burford this weekend.
Also that he's expecting a response from Muddy Waters to Burfords rebuttal.
Looks like another volatile week ahead!