Member Info for Nozzleblast

@Lloydyboy Over the last few months I saw several stocks surge after directors bought hundreds of thousands of pounds worth of stock, combined with material breakthrough news. It does not happen every day, and every situation is different. Literally every company has a positive story to sell, otherwise they won't be here. What matters is the reality - expressed in pounds sterling, allocated by people in charge to the cause, that has material and underappreciated upside. Currently, the directors of QHE express their confidence in the positive news by allocating their entire pocket change allowance. I remain sceptical.

@lloydyboy Exactly. At the moment, QHE is a lottery ticket that the directors are not willing to purchase with their own money, and they know more than we ever could. Perhaps they are waiting for the commercial flow test to fail, tanking the stock. Then, they will purchase a stake as they drill at the apex, knowing that this would have an almost certain chance ofa good flow. I don't know. I will keep an eye on them, but in the absence of a meaningful investment by people in charge I won't touch them.

perfect. then let them directors show what their experience and knowledge are worth. otherwise it is just hot air, smoke, mirrors and conjecture.

as they say in the us army - assumption is the mother of all **** ups.

And, there could be another take on directors buying, or not buying. Imagine you are the director of QHE. You have the detailed inside information, that the company valued at just 10 million has found HALF A BILLION worth of goods. Aren't you going to be tempted to buy the stock? Or you are going to leave your savings in an account paying 0.5%? For me, it is the biggest signal. If any of them comes out and buys, say 100k worth of stock, and then another, I will sit up and listen. Otherwise, I shall pass.

You are right. Not every director has enough cash to buy 10% of the company (although between the seven of them, finding a million quid shouldn't be that hard). Not every director has enough cash, but it helps if they do, as it signals that they are 1. successful elsewhere to have the cash 2. use their supreme judgment to buy into the company they are promoting. Otherwise, it is just hearsay. Who knows, there may be a ton of helium, but how much is it going to cost to extract, refine and sell? How long is that going to take? Will the prices remain high? Also, there are absolutely no institutional investors for this company. Those guys usually provide an extra level of oversight.

What bothers me is the ownership structure. In particular, that the directors hold hardly any stock themselves. The recent purchases only make things worse as they are small tokens and can be interpreted as manipulative. I have seen directors in other companies going all in, buying maybe 10% of the entire company on good news. What we have here is nothing, or worse.

My take is that directors are willing to play this game, but not on their own account, as the future of QHE is highly uncertain, although with potential. So a small stake is rational - no big deal if it does not work out, but the upside could be very significant. I.e. a lottery ticket....

Their lenders would be fools if they didn't foresee the possibility of a statistical dip in revenue, and were prepared to support the company through that.

I think much attention will be spent on asserting the quality of the existing case portfolio, if it is up to the usual high standard, all there is to do is wait.

Growth, however, is tricky, and there is a risk that the management have lowered the standards in order to grow, allowing a flood of poorer quality work to be signed on. Also, the experienced management attention and involvement in selecting cases could have been diluted, or completely diverted away for the new case selection, in that case LIT is doomed. However, the current losses come from cases that are many years old, and are no indication of the quality slippage. There is a lot of money at stake, and quality assurance is mentioned as their prime focus in every release. I have faith that LIT will pull through.

Litigation revenue is famously lumpy. Cases, on average take about 3-4 years to conclude. As there aren't that many of them, there will be years when losses come like buses - all at once. This is a statistical inevitability. If the management and the lenders are aware and cool-headed enough to know this, they will keep their cool and continue with the business as usual. The stock price, however, will yo-yo wildly, as the stockmarket is famously short-sighted. Yes, having a ton of liquidity and/or very understanding lenders/funders is a must for a business like LIT. And very strong stomach for wild stock price fluctuations. The litigation industry is forecast to grow, the management and the company have a very strong track record, if the lenders don't panic, LIT will recover, and then some.

@Stuartrm Awesome post, thank you! Busines of LTM is based on skill, and luck. The luck part is negated by the number of cases they have. If they run just one or two cases, then the results will swing wildly. The large diversification of cases can be likened to a large number of investments (frowned upon by Munger and Buffett, famously called "diworsification" by Peter Lynch) - keeping quality high and keeping track of all of them - is it even possible for a dynamic environment such as active law practice?

"Robust risk management" and "highly experienced team" should ensure that the returns on capital endure.

What we have here is an admitted fault of risk management, hence the "strategic review". To what extent the rot has spread they do not tell you.

Prior statistics do not apply to the future, because the nature of cases changed, from hand-picked and hand-managed to a rag bag of who-knows-what.

It could well be that the bad results will be just a blip, things are not that bad, and the company, having learned a painful lesson, will be stronger than ever.

Or, large amounts of capital have been committed to losing bets, and it will take only a small bias to the lower quality of cases picked to wipe out the remaining equity.

The risk may be acceptable for a punter with a few hundred bucks, but not to someone who is trying to "ensure safety of the principal and an adequate return" as per Benjamin Graham.

I got a bit of stock at 25p, thinking it was cheap. I still hold it, and will continue holding it. Despite the bad news, there is a possibility of strong recovery, but also a possibility of total loss.

The management mentioned during the presentation "an internal estimate" for NAV, which they couldn't share.

The price is down because one of the institutional investors dumped a ton of stock, and nobody wants to touch them, until there is a better idea of how much they are worth and the "material uncertainty over going concern" has dissipated.

The management expressed surprise at the string of bad news, caused either by their poor professional judgement (bad), or just statistical clustering in results (good).

As there are over fifty cases, the statistical clustering is very unlikely. If the nature of the business is "binary" as they say and they win three times as many times as they lose, it is like drawing balls out of a bag, where there are three times as many winning balls as losing. Drawing a long string of losers is possible, but very unlikely.

What is more likely is the usual story - management, drunk on early success, goes partying with the investment bankers and investors, while losing sight of the boring nitty-gritty of case work. And gets slapped on the nose.

The million-dollar question is - the result of the damage. I can't answer this question, not even roughly.

Cases under appeal are valued at around 16 million AUD, or about 7p (UKP) a share, so NAV without the appeal cases is reduced from 25p to 18p.

The rest - the current crop of cases' value is anyone's guess, as per the management themselves. In those circumstances, the only thing they can do is aim to return the money to the investors and the shareholders, and maybe take on very certain cases that they will hand-manage, but it cannot be done at scale.

So, LIT is finished.

Woo hoo, another 3 million gone!

@TotalTrader

I agree with most of what you say, except for one crucial point. I bought LIT at 25p, thinking I was getting about 75% discount to NAV, an excellent track record and a possibility of quick recovery.

What now comes to light is that a large number of cases on the books now were signed without the key man (Patrick) full involvement, and they currently may be looking at bags of garbage, that have nothing to do with the previous track record. This is a catastrophic risk of the company folding completely very quickly.

Simon Thompson was writing high recommendations for LIT, and the brokers were projecting their NAV to hit 150, as recently as last year. Therefore, the current reference number for NAV of 30p (or nearby), given the wild swings that have just happened, may well be negative.

The upside is worth buying if the downside is protected - in the case of LIT, they need to demonstrate that their bag of cases is solid. Currently, we have evidence pointing that it could be anything, and therefore I conclude that I made a mistake investing in them - they are not worth the risk at ANY price.

IMHO, DYOR.

@neuronaut No worries, don't sweat it. The point is though, it is impossible to know what the business is worth now, and the equity, if there is any, can be gone just like that, if the string of losses continues.

Also, nobody's mentioning it - I wonder if they are toast when it comes to raising money from investors again, so the going concern maybe not from the lender calling in the loans, but from the investors losing faith in their skills and unwilling to back them.

This is reputation-destroying stuff, as far as the case funders, and the investors are concerned.

@neuronaut There is no such thing as Australian pence. They use pence for NAV per share, because the shares are quoted in pence, not cents. They have to, even if the entire report is in AUD, otherwise it doesn't make any sense. No adjustment needed for NAV per share, as it is in pence already.

@neuronaut they use cents for net income/loss and pence for NAV. So there is no adjustment needed.

Australia used pence and pounds until 1966. Per share values are in UKP pence. Australia has cents and dollars now.

@dibbidoob Good point.

@Forensics505. Exactly. The share price tanked because one of the RNS was on institutional investor bailing out, and there is no big money wanting to take their place. For the share price to recover one needs to be able to value the business, and currently it is anyone's guess. Equity value is a total guesstimate by an interested party, so carries no weight whatsoever. One would have thought that the risk is spread because they have over 50 cases, and they are on average win way more than they lose, so a string of large losses could be a random event, and in that case they will recover, or it could indicate that they lost the sight of the risk management, over extended themselves and there are a lot more chickens coming home to roost.

As this question cannot be answered with any certainty, only speculative buyers will touch them, but they don't make the weather.