Today I want to look at two companies I believe could deliver bumper returns for investors over the coming years.
Both operate in sectors that appear to be unusually profitable. Although increased competition may be a risk in the future, these businesses are larger than most of their rivals. I believe this should give them good pricing power and economies of scale.
Verdict: more growth
Litigation financing group Burford Capital (LSE: BUR) bucked the market trend this morning with an 18% share price rise during early trading. This company finances legal cases for corporate clients and then collects a share of any damages.
This business model has proved very successful. The AIM-listed firm’s annual profits have risen from $17m in 2013 to $249m in 2017.
However, this growth has relied on a continual supply of new cash to invest in new legal cases, which can take several years to resolve. Today’s share price rise was prompted by news that the firm has secured $1.6bn of new funding on what appear to be very attractive terms.
It’s a complex picture, but the end result is that the company will provide 42% ($633m) of this new cash, but will receive 60% of all profits from the cases in which the cash is invested.
The right time to buy?
Burford’s track record suggests that its staff are skilled at selecting legal cases which can be won. I also think it’s reassuring that the firm’s two top executives, founders Christopher Bogart and Jonathan Molot, each have a shareholding of about 4%. Their interests should be well aligned with those of outside shareholders.
Analysts expect the firm’s earnings per share to rise by about 20% in 2019, putting the stock on a forecast price/earnings ratio of about 14. Although I’m concerned about the risk of boom and bust in this fast-growing sector, I think Burford could be a good long-term investment from current levels.
A potential bargain
Back in April, I rated internet price comparison firm Gocoompare.com Group (LSE: GOCO) as a potential long-term buy. The shares have since fallen heavily and now trade at a level that looks very cheap to me indeed.
The good news is that nothing much seems to have gone wrong. During the first half of the year, management chose to maximise the profitability of the business, rather than chasing growth. As a result, operating profit rose by 9.5% to £17.3m during the six-month period, even though revenue was flat at £75.8m.
This patient approach may have disappointed some investors, but I don’t see a problem with it. In my view, improving profit margins is just as useful as pursuing growth.
Gocompare.com’s share price slide has attracted at least one insider buyer. Chief executive Matthew Crummack bought £50,000 worth of shares in November, at a price of 78p.
The share price at the time of writing is considerably lower, at just 67p. This values the stock at just 8.7 times forecast earnings for 2018, with a dividend yield of 2.7%.
In my view this is probably too cheap for a business with an operating profit margin of 22%. I rate Gocompare.com as a buy for income and growth.
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Roland Head has no position in any of the 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.