Following insider buying at smaller companies can be a very profitable trading strategy. Smaller companies are less researched than larger companies, meaning that they offer greater potential for outperformance.
Here, we are going to highlight an insider purchase at a small UK-listed company, Litigation Capital Management (LIT:LN). Litigation Capital Management provides litigation funding. The company – which considers cases globally – has its head office in Australia, but also has offices in Asia and the UK. It is traded on the London Stock Exchange’s AIM market and currently has a market capitalization of £116 million.
Litigation Capital Management: Insider Buying
Our insider transaction data shows that between January 28 and February 4, two insiders at Litigation Capital Management bought stock. Those who bought shares were:
- Chairman of the Board Jonathan Moulds (600,000 shares @ £0.91 per share)
- CFO Mary Gangemi (27,500 shares @ £0.91 per share)
In total, the two insiders spent close to £570,000 (approx. USD $770,000) on Litigation Capital Management stock.
Sizeable Increase in Holding
Our attention was drawn to these insider trades for two main reasons.
Firstly, the Chairman increased his holding by just over 60%. This suggests he is extremely confident in the future prospects of the company and that he expects the shares to continue to rise in the future.
Secondly, Mr. Moulds has an impressive employment history. Previously, he was COO at Barclays PLC and prior to this he was head of Bank of America’s European business. When Merrill Lynch International and Bank of America merged, he became CEO of Merrill Lynch International. This top-level experience suggests he is well placed to assess the potential of Litigation Capital Management going forward.
Improving Key Performance Indicators
Litigation Capital Management saw a 10% increase in applications for funding during full-year 2021 and expects demand for its services to continue to be strong in full-year 2022.
For 2021, gross profit moved up to AUD $26.6 million from AUD $21.7 million the year prior. Meanwhile, profit before tax of AUD $12.9 million was over 50% higher than the year before. As a result of a favorable environment, the company grew assets under management from $250 million in full-year 2020 to $336 million in full-year in 2021.
Having launched a new $150 million fund in 2021, Litigation Capital Management launched a second new fund in H1 2022 to further accelerate growth in the asset management side of the business and secured a $50 million loan facility to enable flexibility in the amount of investment the company can make personally. This suggests the foundations are being laid for strong growth in the future.
“We remain well positioned for an expected upturn in both insolvency disputes and restructuring events that, we believe, will inevitably occur as business activity resumes and the economic cycle plays out,” said the company in the Annual Report. “The next year promises to be an exciting one in the development and expansion of LCM,” commented Mr. Moulds.
Reflecting on a promising annual report, we see the recent insider buying at Litigation Capital Management as bullish. It suggests that the Chairman continues to believe in the growth story at the company and that the shares have further to run.