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Have £5k to invest? I’m confident this stock could double your money

One company has outperformed virtually every other business listed in London over the past five years, and that is Burford Capital (LSE: BUR). Shares in this litigation finance enterprise have surged more than 1,500% since 2014, as investors have rushed to buy into the growth story.

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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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.