IMF and SGH are 2 very different business really so i reckon there is very little diversification over lap, i own both stocks and have at times tried to buy the only other listed legal stock (IAW) as well...my portfolio is currently 23 stocks and will be limited to 25 - 26, i don't have any problem fitting in all 3 legal stocks into my long term portfolio.
I really cant see a down side to having a portfolio slightly over weight in legals, considering the MC (size) differences and the core business differences.
I agree - IAW, IMF and SGH are very different styles of business, and at the right price one could hold all three, but a brief look at IAW sufficed to conduce me to put it aside. I like the other two, and I hold SGH (bought October 2010 at $1.68).
IAW refers to itself as a legal practice aggregator, which is a red flag for me - not necessary a no-no, but a matter requiring consideration, because many aggregators have ended up in the mire. IAW seeks business in the top end of town, rather than in what I call the Joe-'n-Jane demographic. Anyhow, IAW makes no more profit than two smart lawyers with the usual support staff could make for themselves, so I am not tempted to hurl money at it.
IMF is essentially a financier – it finances large legal proceedings on a no-win-no-pay basis, but it is astute enough to make $3 out of every $1 it invests, so it is very profitable. If, for example, it obtains five results a year on average, then it would not be abnormal for this number to vary between say three and seven, and hence its profits can bounce around from year to year. Also, because the cases are large, but few in number, there is in statistical parlance too small a “population” to keep the $3-to-$1 ratio reasonably constant. A would-be investor cannot read too much into inter-yeaer profit movements. I like IMF, but I am not a shareholder.
SGH is into the Joe-'n-Jane market – personal injury is its fortè, but it is moving into the other lines of business relevant to the Joe-'n-Jane demographic – lines like conveyancing and family law. SGH has self-funded large class-actions, which gives it an overlap with IMF, but it plans not to self-fund these in future. The problem is that the WIP tends to be debited, which is standard accounting practice, but there are not enough of these cases for likelihood-of-failure provisions to average over a year, and this can occasion large write-downs if a case is lost, as happened with the VIOXX decision in YE 30/06/2012. Although SGH has acquired many legal practices in recent years, it did this to achieve footprint in geographic and line-of-business (e.g., conveyancing) catchment areas, rather than as an “aggregator” per se, and management has stated that acquisition activity will now be reduced. I think SGH has a good business model, and I am banking on management doing the things that they have said they would do – namely:
* substantially reduce the level of acquisition activity;
* focus on growing the business organically;
* focus on settling down past acquisitions and improving margins; and
* cooperate with “funders” in large VIOXX-style litigation, rather than self-funding these.
Because of its mass-market style of business, SGH should be more predictable than IMF, but IMF's low costs means that its profit swings range from good to exceptionally good – swings that may cause some investors to sell when they should not, and so create opportunities for the canny who understand the flip-flop nature of the beast.