Shares in litigation finance provider Burford Capital (LSE: BUR) have been a tough investment to own over the past 12 months.
Heading into 2019, the company was something of a market darling. However, after Burford came under attack from the noted short-seller Muddy Waters in the middle of the year, the stock plunged.
The company has been struggling to rebuild its reputation ever since. After a modest recovery towards the end of 2019, the stock price has resumed its downtrend this year.
A “quiet” 2019
According to the company’s latest trading update, after a “quiet” 2019, Burford’s profits for the year will now come in below expectations. In the update, management is forecasting $20m to $30m less in net realised gains for the year. Meanwhile, the group is also expecting $50m to $70m less in net unrealised gains. That’s current cases that have been marked up in value.
Nonetheless, while these figures are disappointing, management notes that the business has improved significantly since the end of 2019. The company claims that if its January trading update were delayed for a month, results would have been better.
Burford insists it has achieved several “litigation successes” in January. These could generate more than $150m in profit across the group in a single month as well as $100m of balance sheet profit.
This trading update seems to suggest that Muddy Waters’ attack on the business last year has not had an enormous impact on its underlying performance. The company still seems to be racking up profits in this niche area of the financial markets.
That being said, the stock continues to trade at a low valuation. It is currently dealing on a price-to-earnings (P/E) ratio of 5.1. This seems to suggest that the market still doesn’t entirely trust Burford’s figures, even though the company has gone out of its way to try to improve transparency.
Further progress needed
As such, it looks as if the next 12 months could be vital for the firm. Burford needs to prove to the market that the short attack has not had a significant impact on operations. While today’s trading update does go some way to meeting these concerns, further positive updates will help reinforce the fact.
If the litigation finance provider does continue to grow throughout 2020, the stock could offer a wide margin of safety at current levels. Historically, the shares have commanded a valuation of more than 20 times earnings. That suggests they could be undervalued by as much as 75%. Also, the shares support a dividend yield of 1.6%.
Therefore, this might be an attractive holding for those investors with a higher risk-tolerance. The risk-reward ratio looks highly attractive at current levels, but it could be some time before the market starts to trust Burford again.
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.