Three Stocks Primed to Benefit from Covid, week 1 - Burford Capital

Whatever happens, there will always be winners….

What will the world look like a year from today? As we start a new year, I’d like to step back and think about which companies are ideally placed to prosper in the aftermath of Covid over the coming year and beyond.

First, let’s consider the economic backdrop. In all my years investing in the markets (possibly with the exception of those two scary ‘end of the financial system’ October weeks in the 2008 financial crisis), I don’t think I can remember a time with such an uncertain economic picture. The bull case rests on the positive economic implications of the end of Covid thanks to the rollout of the vaccine, further boosted by unprecedented levels of monetary stimulus. Investors are growing hopeful that this will result in an enormous ‘roaring 20’s’ type economic boom – similar in magnitude to that which followed the Spanish flu in the 1920’s – as pent-up demand and easy money turbo-charge the post-Covid economic recovery. There is a pretty large consensus on this, with the implication that inflation and pricing power finally return to boost corporate profits in virtually every sector. Jobs and profits become so easy to come by that as investors, we can buy the most bombed-out and out of favour sectors and still make disproportionate returns. In terms of valuations, bulls argue that PE multiple expansion has really only been focused on a few stocks and sectors so wider market valuations are generally not that high, especially in the context of such a low-interest rate world, where equities remain the only game in town in terms of real inflation-adjusted returns.

At the other end of the spectrum, you have the bear case which centres on the third wave of Covid leading to successive shutdowns, with the vaccine’s slow rollout process unable to prevent this from happening. Under this extremely bearish scenario, we face a deep and prolonged recession, no matter the size of any monetary stimulus package and this downturn is exacerbated by the lack of pricing power and wage growth in most areas of the economy as powerful deflationary megatrends (ageing populations, automation, robotics etc) continue to take effect. Against this backdrop, most market sectors would struggle, and the sky-high asset valuations and ballooning government debt piles would add to the potential risks…

Big picture, the fact that uncertainties exist is very normal. In fact, markets typically climb ‘a wall of worry’ even in the biggest bull markets. Study after study highlights how staying invested over the long term through the market gyrations is actually your best bet to achieving attractive returns, especially for people with decades left to retirement. Furthermore, there are always winners however negative or uncertain the economic situation as a whole and it’s usually possible to find these outliers through detailed research and fundamental analysis.

I’ve been wracking my brain who wins from the aftermath of Covid. Typically much of my portfolio focuses on companies which are less economically sensitive as their growth is more based on exposure to some powerful theme or megatrend. Although these companies do not, therefore, benefit as much from a roaring economy scenario, I believe in most situations this lack of economic sensitivity is a plus and gives them an ‘all-weather’ chance of achieving their plans. In terms of finding who stands to win now, it has proved hard to find actual beneficiaries of the Covid-induced economic downturn, where there are really positive business implications and where the stock is still under the radar in valuations terms. Overall, I feel most confident that the three stocks I am going to tell you about over the next few posts will prosper in this post-Covid year ahead. Today, I’d like to tell you about why I believe Burford Capital is well-positioned in the year ahead:

Three Stocks Primed to Benefit from Covid
Date: January 7, 2021

Burford Capital, a large-cap UK /US listed market leader in litigation funding likely to benefit from all the corporate disputes generated by Covid business disruption

Burford Capital, founded in 2009, is the market leader in offering financing to lawyers and clients engaged in litigation and arbitration, asset recovery and other legal finance and advisory activities. This is a niche funding area that continues to have enormous growth potential as companies increasingly choose not to have their hard-earned capital tied up in this way. By having a strong market position and being very selective in taking on corporate cases, Burford has achieved a spectacular long term track record in IRR terms.


Source: Stockopedia
Past performance is not a true indicator of future results.

Investment Case

I believe Burford is one of the very few companies that benefit from the exact situation we find ourselves in following the Covid-induced downturn. I am very bullish on their prospects next year following a recent investor call.

The CEO explained in some detail on the call why he expects a big boost to new business this year for Burford with reference to what happened in the aftermath of 2008 (ie a one-off event that was in a lot of ways like Covid, bigger and more sudden than a normal economic downturn). In addition, it is clear that historically recession boosts corporate disputes/litigation business anyway, but these one-off shocks are even more of a boost. One example of how Covid boosts corporate liability disputes: a ship full of bananas arrives at a port which is closed due to Covid. Bananas rot, who should pay?

Overall, I believe there are excellent prospects for a whole new raft of Covid-related disputes which companies do not want to tie their capital up with – on top of the boost we could expect looking historically at what happened in a normal downturn. Interestingly, the CEO pointed out that in 2008 you didn’t see the skyrocket in litigation business in the ‘eye of the storm’ of 2008 as companies were understandably firefighting. These took place in 2009 when the dust started to settle. The hope is the same positive boost to business will emerge for Burford this year.

Recent US dual listing: corporate litigation funding is far better understood and therefore more highly valued by US investors. Burford’s recent US dual listing is in my opinion very likely to lead to multiple expansion as the US shareholder base increases from 30% to more like an expected 50%. This is especially true as the business is currently valued on a paltry 7x PE.

Some courts have been closed / jury trials put on hold due to Covid, delaying awards to the business. Burford’s recent results were amazing nonetheless but this backlog of court cases is a positive as it adds a layer of pretty certain recovery prospects in the business (unlike a restaurant, where business lost this week is business lost forever, no one will walk away from a £100m litigation claim because of Covid delays).

Burford throws off a lot of cash and is in an excellent position to pay large dividends going forward. Like a lot of UK businesses, Burford chose to ‘delay’ its dividend pending a review of the business impact of Covid. As the normal business of the courts resumes, the resumption of the dividend is another valuation upside catalyst.

Thanks to the aftermath of the short-selling Muddy Waters debacle, we can still buy the shares 30% cheaper than a year ago despite a material uplift in earnings and the order book announced in the recent results. I think the low valuation, excellent business prospects, the likely multiple expansion from US listing and most importantly the scarcity value of a business which actively benefits from Covid means it’s not unrealistic to expect a doubling of the share price over the next two years.

burford capital diluted EPS for post covid beneficiaries pynk community task burford capital total revenue for post covid beneficiaries pynk community task

Source: Stockopedia
Past performance is not a true indicator of future results.

Risks

  • The risks to the business model centre on the lumpiness and uncertainty of winning cases (though the growth in the number of cases helps to smooth returns)
  • Risk of sourcing enough attractive cases as competition heats up, depressing returns on future cases versus the IRR’s generated in the past (though they are the market leader so are better positioned than new entrants)
  • The risk that Covid stays rampant and that courts remain shut (delaying the resolution of cases further)
  • My biggest worry with Burford is the fact that they have one case on their books worth a whopping $800m – the value is underscored by the sale a few years back of 20% of this case to a third party for $200m - I think this transaction was designed to show investors its true value. This one case is called the Peterson case, (basically, it’s with the Argentine government on the other side), and up to very recently, has dwarfed their other claims in terms of size so made the valuation outlook more uncertain as so much hinged on the outcome of this one case. But now we’ve seen that 2020 results showed very good growth on 2019 despite no new developments on Peterson and the excellent prospects highlighted above have nothing to do with earning a penny from Petersen. I think as the business demonstrates it’s not all been about getting lucky on something massive like Peterson, investors will attach a higher valuation to the shares. However, the risk remains that any negative Petersen newsflow will hit the share price.
  • The negative report and ongoing short-selling campaign last year from short-seller specialist Muddy Waters decimated the Burford share price, as they basically claimed Burford’s returns were too good to be true. While Burford didn’t manage to prove to the SEC/FCA that Muddy Waters and their associates had put in place short positions and acted in concert ahead of their research note, other seasoned investors gave point by point counterarguments to MW’s claims
  • Interestingly, the CEO pointed out that he has now willingly subjected himself and the whole company to a stringent SEC dual listing due diligence review and any glaring shortcomings surely would have been revealed by this. I feel this recent regulatory due diligence lowers the risk of a new short selling attack and will over time go some way to restoring investor confidence. However, a similar short selling attack cannot be ruled out.

Now it’s your turn:

  1. Which other companies are ideally placed to prosper in the aftermath of Covid over the coming year and beyond?

  2. Why are they well-positioned to prosper in the aftermath of Covid over the coming year and beyond?

  3. What are the risks associated with your companies of choice?

Disclaimer: This information does not constitute any form of advice or recommendation by Pynk One Ltd. and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.
When investing, your capital is at risk and you may recover less than the initial investment.

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Medical farming the best donation 2021!

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Biotech is likely to be the real winner of the crisis. It has largely gone unnoticed, but producing three vaccines in under a year has been remarkable. Thanks to AI and data centres (Amazon) biotech companies have found a solution in 10 months rather than the usual 10 years. Going forward there will be great breakthroughs in the next few years as the time to develop drugs accelerates and costs are reduced. Someone said recently that when the next pandemic comes, With AI and quantum computing a vaccine could be found in as little as a week.

A company I think is in a strong position to benefit is Peter Thiel backed Abcellera.

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I have few in mind but I’ll start with Ninantic, they started as a startup from within Google but in 2015. they had series A funding and are private company now, they had series C round in 2019.
They offer lots of mobile games and Pokemon GO is the biggest one.

Why I think they are well positioned to prosper in covid aftermath?
One of the main characteristics of the game is to get you outside and socialize with other, that is heavily limited since covid and that is limiting their growth for sure.
Releasing the restrictions will influence them a lot because people can play the game as intended, outside and with others.
During first 10 months in 2020 they had 1 billion usd in revenue from Pokemon GO alone, which is 106 million more than in whole 2019.
They added new features to make the game more fun during covid and their income is growing even tough world is going from lockdown to lockdown so they are not able to organise any public events like before and charge admission fees.

I suppose that a lot of people is not playing the game because of covid impact and lot of them will return to it when things get more normal.
That coupled with growing gaming industry in general and possible you can go outside campaigns, enjoy the fresh air seems like a perfect formula for Ninantic.

Possible risks are:

  • game stops being popular (but they don’t have competion in that kind of game and community is very dedicated
  • pokemon brand stops being popular
  • big public events won’t be allowed for long time (theirs aren’t as close as going to a concert)

Burford Capital seems like an excellent idea, number of corporate disputes could skyrocket when everything settles down a bit and things get clearer!

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Retail e-commerce companies like ASOS or Zalando come to mind… I suspect that shopping habits have changed for good over the past year, and these companies will prosper in 2021 and beyond. Although new competitors in the sector might be a risk beyond 2021.

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Netflix is releasing some major movies in 2021 as more people are staying home. So the theaters will struggle as netflix and other streaming services soar.

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I guess the company will clean energy which will be the number one day word in the future

And telemarketing companies

The field of hygiene and medicine
Games and entertainment company

As for the epidemic

I think the only solution is herd immunity

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Hello everyone :wave:

Based on the article written by Pouneh together with the ensuing discussion, how would you categorize your sentiment towards Burford Capital?

Please select one option
  • Strong Buy
  • Buy
  • Neutral
  • Sell
  • Strong Sell

0 voters

Note this question is done under the prediction services of Pynk and should not be understood as an investment recommendation, advice or endorsement.

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I wasn’t able to share the link for some reason but I came across this info

Screenshot_20210115-083410|281x500

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Which app/website is that @KarenM?

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Yahoo finance @Al_Wallace

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Hi Karen
I agree with all the key points from the site you share. As I said, Synairgen is an early stage biotech company therefore highly volatile in terms of price (e.g. recently to newsflow on vaccines and trial results), without meaningful revenues yet and having undertaken a large recent equity raise.
I find this site useful more as a quantitative screening tool and a starting point for analysis of the reasons behind these metrics.
Your capital is at risk.

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Key takeaways from Burford’s business update today: some negative impact from the pandemic but excellent news on ROIC, cash generation and showing confidence in the outlook by fully reinstating dividend:

  • Full year Operating profit expected to be $240M-$250M, down from the $265M in 2019. The decline reflects modestly higher general operating expenses, in line with the company’s growth strategy.
  • New Business: New commitments were negatively affected by the pandemic in the first half of 2020 (as courts closed) but activity rebounded in the second half of 2020 to return to levels consistent with the second half of 2019, but not sufficiently to offset the slower first half.
  • Resumption of dividend payment of 12.5 cents per share dividend for 2020 in June 2021; the company suspended its dividend early last year due to uncertainty concerning the effects of COVID-19.
  • Profit after tax is expected to be $160M-$170M, down from $212M in 2019; the 2020 figure was affected by a large book tax charge.
  • Group-wide realizations of $608M increased 72% Y/Y and balance sheet realizations of $336M rose 47%.

Christopher Bogart, CEO, Burford Capital, commented:

“2020 was another year of strong performance for Burford. We achieved record amounts of asset realizations from core litigation finance, which generated more realized gains and cash proceeds from case successes than ever before, driving our cumulative concluded case ROIC to an all-time year-end high of 92%. With cash on Burford’s balance sheet of $336 million at the end of 2020, we are in a strong position to fund the additional future growth we anticipate. We look to the remainder of 2021 with excitement.”

Burford Capital Regulatory News. Live BUR RNS. Regulatory News Articles for Burford Capital Limited Ord Npv (Di) (lse.co.uk)

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1 Like
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