I’ve been searching for penny stocks to buy recently. My portfolio is primarily concentrated in larger companies that feature in major stock market indexes such as the FTSE 100 and S&P 500. However, I don’t want to overlook smaller firms with rock-bottom share prices that offer the potential for massive returns.
Such high-growth investment opportunities come with considerable risks. That said, I can stomach greater volatility if the risk/reward profile is sufficiently attractive.
One penny stock that caught my eye is AIM-listed legal and professional services group RBG Holdings (LSE:RBGP). Here’s my take on the outlook for the business.
Legal industry exposure
RBG Holdings is a unique company. In fact, it’s more accurate to describe it as a group of three distinct companies, namely law firms Rosenblatt and Memery Crystal as well as specialist M&A boutique Convex Capital Limited.
Currently, it also owns LionFish, a litigation finance business. However, the group intends to dispose of this arm after writing off £4m last year in the wake of losing two cases it invested in with no prospect of further appeals.
It’s rare to see legal services companies quoted on the UK stock market. That’s because the vast majority of firms in this lucrative sector aren’t technically companies. Instead, they’re limited liability partnerships (LLPs), owned by lawyers as business partners rather than outside investors.
British law firms have only been able to attract external investment from stock market flotations since 2010. And just a handful have done so since Gateley Holdings made the inaugural move in 2015.
Promising financial results
Sometimes, taking the road less travelled can yield rewards. Although RBG Holdings’ litigation funding subsidiary flopped, the other ventures have proved much more successful.
Since its 2018 IPO, revenue has more than trebled and EBITDA has doubled. For the last financial year, revenue rose 26% to hit £54.1m, adjusted EBITDA increased 54% to £15.8m, and adjusted pre-tax profit soared 66% to £10.9m.
These are impressive numbers, yet the shares have slumped in recent months following news of LionFish’s difficulties. If the group can successfully address its ongoing exposure to this business, I think there’s plenty of room for share price growth from today’s levels.
Crucially, the company is well diversified. Rosenblatt has a solid reputation in dispute resolution. Memery Crystal’s strengths in corporate law and real estate complement this nicely.
The performance of these separate areas of legal practice fluctuate at different times, depending on the stage of the macroeconomic cycle we’re in.
In addition, the company states that Convex Capital Limited has “a strong pipeline of deals which remain in process”.
Why I’d buy this stock
I have some concerns about investing in RBG Holdings. In light of listed law firms’ recent entry into the public markets, uncertainties exist regarding how they should be valued.
Plus, the company could struggle to attract the top legal talent with no route to partnership on offer unlike most of its competitors.
However, this is a business exhibiting commendable financial strength with a downtrodden share price. That’s a dream combination for a bargain-hunting investor like me.
Overall, I think there’s a growth story in the making here. If I had spare cash, I’d buy this penny stock today.
