Burford Capital shares just tanked. What’s the best move now?

To say it’s been an interesting week for Burford Capital (LSE: BUR) shares would be an understatement. After closing at 1,381p on Monday, the Neil Woodford-backed stock fell almost 20% on Tuesday, and then tanked nearly around 50% on Wednesday. Yesterday, though, the share price surged 26%.  

The reason the shares in the litigation finance company fell so far earlier in the week is that US research firm Muddy Waters, which is run by prominent short-seller Carson Block, released a damning research report on the AIM-listed company.

So, what does this mean for Burford shares? Is it is a stock to be avoided or has the huge share price fall created a buying opportunity?

Muddy Waters’ report

The report from Muddy Waters makes a number of claims in relation to Burford. I won’t list them all here, but to summarise, Muddy Waters alleges that:

• Burford manipulates its metrics to create a “misleading picture” of investment returns.

• Burford is “financially fragile”, at “high risk of a liquidity crunch”, and “arguably insolvent.”

• Profits since 2012 have been based on just four litigation cases, one of which was a loss and was bailed out by Invesco.

• Burford’s corporate governance is “laughable” as the CFO is the wife of the CEO.

Burford hits back

Unsurprisingly, Burford has hit back at the report. On Wednesday, it released an announcement stating that its returns are “robust” and that it had over $400m in cash and cash equivalents at 5 August. Then, yesterday, the group issued a formal response which stated that Muddy Waters’ claims are “false and misleading.” It rebutted all of Muddy Waters’ points and advised that the group is solvent, generates strong cash flow and that its accounting is transparent. It also said it would consider a share buyback. In addition, CEO Christopher Bogart bought 123,747 shares (a substantial purchase) yesterday and two more directors have purchased shares since. 

What’s the best move now?

So, what should investors make of this unusual situation? Are the shares a bargain after falling so far?

My own personal take is that Burford shares should be avoided for now. The main reason I say this is Carson Block – who was listed in Bloomberg Markets’ 2011 ‘50 Most Influential’ list, which features individuals with “the ability to move markets or shape ideas and policies” – has a strong track record. For example, he bet against Irish biotech company Prothena (another Woodford stock) and this lost 70% of its value last April. His firm Muddy Waters is best known for spotting fraud at Sino-Forest Corp, a Canadian-listed Chinese company whose stock fell nearly 75% before it filed for bankruptcy in March 2012. Given his track record, I wouldn’t want to bet against him.

Yesterday’s announcements from Burford – particularly the large insider purchases – suggest that Muddy Waters may not have got it right this time. However, all things considered, I’d leave the stock alone for now. Burford shares could continue rebounding if Muddy Water’s claims turn out to be incorrect, however, in my view, there is too much risk for now.