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Penny stocks may experience larger share price movements than more established companies. This means that investors take on the risk of considerable volatility, but the potential rewards can be attractive.
One small-cap stock that I am keeping an eye on for my portfolio is litigation capital management (LSE:LIT). The Sydney headquartered business provides financial and risk management services to the legal industry. It has a special focus on litigation and arbitration.
The share price has skyrocketed recently following the realization of a highly successful direct arbitrage investment. I think there are many legal matters awaiting judgment Objective-The listed stock has the potential to move higher. here’s why.
a big win
Litigation capital management generates revenue through funding costly legal actions. If the claims in which he invests are successful, the company makes a profit. It also usually charges a success fee.
Such investments can be highly profitable. Most recently, the firm realized an impressive 635% return on a long-running confidential dispute at the London Court of International Arbitration. The company achieved a gross profit of approximately £31m from an initial investment of £4.8m.
prospect ahead
There is more than one successful brawl in this business. The group has indicated that a series of recent resolutions may be its “Strongest performance ever by a significant marginWhen its full year results are announced in September.
In addition, the business is exposed to dozens of projects that are due to mature in the coming months and years.
The direct investment portfolio is well diversified. This includes class action, arbitration, commercial disputes, competition claims, bankruptcy, intellectual property, and more. As of February 28, 56% of the portfolio was concentrated in EMEA and 44% in the Asia-Pacific region. This diversification helps the company to perform well in different phases of the macroeconomic cycle.
Keeping to its estimates, the board declared a dividend of 2.25p per ordinary share in September. So not only can investors potentially benefit from future share price growth, but there’s also a handy amount of passive income on offer.
risk
Litigation and arbitration are inherently unpredictable. Although the Company has a well-qualified team of experts who conduct due diligence on legal and financial risks, the Company will inevitably invest in unsuccessful claims. Bad investments can hurt revenue and, in turn, the stock price.
Furthermore, the company operates in a highly regulated sector. A recent decision by the UK Supreme Court will have a significant impact on the litigation finance system as it applies in the UK.
This decision is expected “Very limited or no effectAccording to the company, on Litigation Capital Finance. This is because the group structures its funding contracts using an increasing multiplier of the invested capital over time, rather than simply calculating the return as a percentage of the court’s judgment.
However, there is a risk that future legal changes could pose challenges to the business model. After all, the growth in litigation financing is a relatively recent phenomenon and the company is subject to a dynamic, evolving regulatory environment.
a stock i would buy
This penny stock provides exposure in an exciting sector. Recent successes and a solid investment portfolio point to a bright future.
Although it has potential challenges, the risk/reward profile seems attractive to me. If I had the spare cash, I would buy today.
The post 1 Emerging Penny Stock I’d Buy Today at 88p appeared first on The Motley Fool UK.
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Charlie Carman has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The views expressed on the companies mentioned in this article are the author’s own and therefore may differ from the official recommendations made in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights can make us better investors.
Motley Fool UK 2023
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