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Burford Capital: A Reversal Of Fortunes

The short attack on Burford mounted by the US Hedge Fund, Muddy Waters (MW) did have a profound effect on the share price causing it to tumble by over 60% by mid-morning today.  Having suffered a similar bear attack from Carson Block's posse  in the past I can empathise with holders who have suffered losses today. It is never a pleasant experience and the effects on sentiment can last much longer than the duration of the bear attack . When BUR announced results on 25 July, I commented on the intraday reversal as a bearish sign and sell-signal here.  Below are charts indicating some of the warning signs that suggested the name was due a sell-off: It combines a double top, head and shoulders reversal and a failed breakout and is a good case study in the use of charts to time exits. In summary the charts were already showing a marked change in sentiment where rallies were being sold not bought as they were in its rapid ascent;  the overall AIM market has been weaker in 2019 following the sell-off in Q3 2018. Finally the recent volatility over the past couple of weeks has heightened nervousness in what is predominantly a retail owned stock. MW timed this attack perfectly to maximise damage.

Burford is a finance firm providing  litigation finance, insurance and risk transfer amongst other investment activities. It has enjoyed a stellar run up in price over the past 4 years from its breakout above the £1.50 previous ATH in July 2015 to a high of   almost £21 in Sep 2018: propelled by its profitability and growth rate. The Muddy Waters Report cites accounting irregularities in how Burford recognised revenues from its cases and booked profits. The 25 page report can be accessed here. while a video interview with Carson Block, MW's CEO is below.

Figure 1. Burford 2018-2019 Reversal: CLICK ON IMAGE TO VIEW FULL-SCREEN

Examination of the Chart in Figure 1 shows a downtrend in the price from the all-time-high (ATH)  last September  with a trendline that was respected with the exception of a failed breakout on results in March 2019.  Combined with the overall downtrend, the magnitude of both the move in price and the volume on results was a confirmation  that sentiment had changed. The March high was a rejection of the previous ATH where holders chose to sell rather than to hold or add. BUR continued to sell-off through April before finding buyers at previous support where there was residual demand. This was enough to rally the price back to the downward trend line where supply clearly overcame demand. Burford then sold-off to new 2019 lows

While the narrative for the share price weakness was complicated by Neil Woodford's freezing of his Equity Income Fund fund, with rumours that BUR share price weakness was owing to Woodford's unwinding his positions:   there is no evidence that the almost 9% held by Woodford Investment were sold  either via announcements as TR1s or in the shareholder register : Invesco  has been selling since Oct 17 from a position of 25% to the current 13.9%. There was no particular acceleration to explain the share price weakness.  In other words, the share price underperformance was due to other issues.

Figure 2. Burford Capital Shareholders

The price action in May and June was dominated by several rejections of the 200MA,  when price languishes below the 200 and fails to break above it there is clear evidence that the long trend is likely to remain  downward unless there is a catalyst . Price action in late June and early July became tight and range bound as volatility decreased and volume dropped; these periods are often akin to a winding spring as a volatility breakout is building. This came in the form of the results on 25 July where BUR announced record profits:  the price duly spiked intraday and rallied over 8% before reversing at the long term downward trend line. The close on 25 July down -8% was a bearish sign and clear warning to sell.

Figure 2. Burford 2018-2019 Reversal Zoomed: CLICK ON IMAGE TO VIEW FULL-SCREEN

The failed breakout from the March 19 results formed the "head " in a head and shoulder reversal pattern: the neckline being at £15.9: a drop of £4.60 from the peak so the target for an H&S reversal was around the £11.3 level. The rumour of an impending short attack yesterday resulted in  a price fall to near the H&S reversal target when BUR closed at £11.21.

Its precipitous drop today is unlikely to be reversed anytime soon and marks a very significant change in sentiment. Irrespective of the veracity of the shorters claims or any litigation that may ensue, BUR is unlikely to see its previous highs for many years to come if ever again.Today also saw a collapse in BUR corporate bonds with losses of 20-30%  especially on the longer dated 2026 bond which was down over 32% at the lows. This reflects the nervousness on the long term viability of BUR.

There is likely to be a tradable bounce over the next few days, with appropriate position sizing and risk management. Not one for the risk averse.

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