Online gambling stocks look a bit beaten up following a wave of legislation changes across Europe that have hit earnings forecasts. Investors have been quick to sell and the sector is arguably heading into oversold territory, but this is not the reason that I am interested as it can be dangerous to try and call the bottom.
Worth a gamble?
The reason that this sector is interesting me at the moment is the opportunity in America: it is deregulating online gambling, potentially paving the way for UK companies to meet the call. 888 Holdings (LSE:888) is one company that I think could be a winner as it is currently the second largest poker site in the world. It had lost about 50% of its value following a string of bad news reports, but the company has updated the market and said it is now trading in line with revised forecasts. It is positioning itself for the American market having opened its first US sports betting website and will spread across the region based on changes in legislation.
Being a big player in the UK and Europe should help with expansion into the US as 888 has a good international reputation and good cash reserves. Looking at the valuation, it trades on a very modest price-to-earnings ratio of 11 suggesting that the price is cheap following the sell-off. It has a dividend of 7.3%, although following earnings downgrades, I could see this being reduced. Given the size of the potential opportunity for 888 I’d consider buying but would avoid going all-in.
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Litigation finance
Another sector I’ll be watching is litigation finance. This sector has long been viewed with scepticism, partly because of concerns over regulation which are starting to look unfounded. 2018 saw a flurry of sector activity with listings from Manolete Partners and Litigation Capital Management to name just two, this suggests to me that the industry could be going through a change in perception. The opportunity for these companies is huge with only a fraction of legal cases currently insured so I think it should be a while before growth slows.
The main international player in this market is AIM-listed Burford Capital (LSE:BUR). After a good start to last year where the price almost doubled, October saw the start of a 35% price fall on no news. The price bounced back 20% last week following the announcement of an agreement with a sovereign wealth fund that is skewed in the company’s favour. This agreement showed the strength of business and its position at the top of a sector in which I think large and respected companies are most likely to prosper.
I spoke in more detail about the prospects for Burford back in September as its sector has some interesting characteristics. It can be viewed as defensive as lawsuits don’t tail off during times of economic hardship and are potentially more common. Therefore the big fall in price recently seems entirely based on investor nervousness and presented a good buying opportunity. However one downside is very little revenue visibility because of the confidentiality of legal claims. Therefore when investing in litigation finance, it is very important to focus on the management, because this is essentially what you’re investing in.
