I’ve recently been investing a fairly sizeable sum of new capital to my portfolio. The rebalancing required to account for this explains many of the recent transactions in the fantasy fund I use to track my performance. As well as topping up a few existing holdings, I’ve made a couple of new purchases last week: IG Group and Burford Capital. I’ve also sold out of Boohoo for an 8% loss, as the price has broken down to new lows. I expect it to bounce back fairly soon (it reports in April) though I’m going to wait and see from the sidelines rather than hold in hope.
IG Group provides an online trading platform, focusing primarily on contracts-for-difference (CFD) and spreadbetting. I have owned it previously but sold at the time of profit warning last year due to the FCA investigation (fortunately managing to avoid most of the price fall by selling at the opening bell).
- Business economics: IGG is just the sort of business I like: capital-light and highly profitable. It makes an operating margin of 45% and returns on capital consistently around or above 30%.
- Track record: IGG has a reasonably consistent track record of growing revenues and profits for the last 10 years or so since it listed. The share price has followed suit, with the exception of a large fall just over a year ago. The reason for the fall was the announcement of an FCA review of the CFD market. This review concluded early this year with no adverse implications for IGG.
- Competitive advantage: IGG is the UK leader in CFDs and spreadbetting and has a very good customer offering. There are a number of other smaller players but competition is not likely to be very intense as customers in this sort of market are unlikely to switch providers very easily or frequently. Consequently a lot of IGG’s revenues are fairly predictable. IGG has a greater focus on more professional, higher value clients than its competitors and is looking to extend this focus. One of the benefits of the regulation IGG faces is that it makes it more difficult for potential entrants to come into the market.
- Growth prospects: in the longer term the market looks likely to experience secular growth as engagement with the market rises and new financial products emerge (e.g. the next Bitcoin). In the shorter term, growth prospects are a bit more limited. The main concerns are with regulatory interventions taking place in Europe, in particular with ESMA proposals to restrict leverage available to clients. This does create some risk for IGG, but having done a bit of background reading through IGG’s RNSs, the potential financial impact looks likely to be fairly small and I can’t see major cause for concern from this longer term.
Momentum is good. IGG’s share price is back near where it was before the big fall last year and near 1-year highs. Its interim results in January were fairly positive with a positive outlook despite the regulatory intervention. It is due to update on trading tomorrow. The valuation seems reasonable given its quality.
Burford Capital is a specialist provider of litigation finance. Burford issued some stellar results last week causing the price to rise some 30%. I was disappointed not to be holding at the time, as it is one of my favourite businesses and I have profitably traded it several times in the recent past. The regret this sort of situation causes always makes it psychologically difficult to buy back again but that’s not a good reason not to.
- Business economics: Burford is more like an investment fund than a typical business, making comparisons with other businesses a little tricky. However, has all the attributes I like. It’s a knowledge-based capital light business with good returns on capital.
- Track record: Burford has a spectacular record of growth in profits for the last few years with no signs of slowing in the near term.
- Competitive advantage: litigation finance is a relatively nascent market and Burford is the major player. It seems to have been spectacularly more successful than its rivals, which points to a competitive advantage. The underlying contributing factors are likely to be superior strategy, know-how, client relationships, reputation and now scale. This is spelled out explicitly in more detail by Burford in its annual report (and makes sense to me). Compared to most other businesses, Burford is probably the best I have come across at explaining its strategy and competitive advantages to investors. Take this with a pinch of salt as it is run by hotshot lawyers but it seems like a good sign to me.
- Growth prospects: are very exciting. The litigation finance market seems to be growing at an explosive rate. Burford is one of those rare companies that seems to be able to reinvest all of its profit (plus frequently raising additional debt) for very high returns. Obviously this can’t go on for ever but there are no signs of it slowing soon.
Momentum is excellent with the price making a huge jump in price following spectacular results last week. I think the valuation could still be pretty cheap given the growth potential. The price has fallen today following a significant placing for the founders to sell a large part of their holding. This could be a good opportunity to buy in – I’m tempted to build this position up quickly.