Can Investors Trust JG Wentworth Co?

J.G. Wentworth Co (NYSE:JGW), a settlement funding company, was recently sued for allegedly violating federal antitrust law following its acquisition of Peachtree in 2011. This raises a question of if investors can trust this company.

Novation Ventures, LLC, another settlement funding company, which filed the lawsuit, alleged that the two companies aimed to monopolize the industry with the 2011 acquisition. As a result of the acquisition, the two companies now own 75 percent of the settlement funding market. Novation’s frustration is understandable considering that it owns a meager 7 percent of the market.

Part of the argument is that consumers do not have sufficient options to choose from since smaller companies – iSettlement, a digital structured settlement company, for instance – cannot compete adequately. As such, consumers are probably not getting enough competitive deals.

Through the lawsuit, Novation seeks an injunction for JG Wentworth to divest its interest in Peachtree. Novation also seeks over $15 million in damages due to the alleged monopoly.

Why shareholders should be weary of the lawsuit

According to the lawsuit, Wentworth owned between 40 and 45 percent of the market, while Peachtree had between 25 and 30 percent of the market before the acquisition. Therefore, if Novation ends up winning a divestment injunction, Wenthworth is likely to lose about 30 percent of the market. This could effectively mean that it would lose about 30 percent of its revenues.

The potential risk becomes more apparent when you consider that the company reported in its 2012 report that it saw an 84.5 percent increase in revenues “primarily due to the Peachtree Merger.” Therefore, if Wentworth is ordered to divest its interest in Peachtree, the company’s financials will suffer.

Moreover, such ruling would make the company so small that the risks associated with its business will become magnified. In addition, investors have to consider the fact that its earnings dropped in 2013, which was followed by series of downward revisions in 2014. If the court grants a divestment injunction, chances are its financials will fare even worse.

One other concern that an unfavorable outcome will bring is this company’s ability to cope in a recession – which will most certainly come around eventually. One thing to remember is that the company filed for bankruptcy during the last recession. So investors have to conduct their due diligence before investing or keeping their money in this company.

A strategy to employ to avoid recession-susceptible stocks

One of the attributes of companies that can buck recession is that they have a strong track record of providing long-lasting value. You can see this in practice in Lane End Conference Center’s a press release, in which the company said it was able to buck recession because it committed to continuous value delivery through profit re-investment instead of cutting back.

Familiar companies like Ford Motor Company (NYSE:F) and Amazon (NASDAQ: NASDAQ:AMZN) have also applied this principle to buck recessions.

For instance, Amazon, which was fundamentally founded to help people get their needs (originally books) at fair prices from their homes, created platforms like the Amazon Mechanical Turk. This helps small businesses like Take 1 Transcription and PC-Dial-A-Fix outsource simple tasks, which ends up helping businesses save money as well as helping unemployed folks make some buck. However, with this system, it increases the chances that Turk workers will spend their earning on its website.

Ford, on the other hand, switched focus to fuel-efficient vehicles during recession to help people save money.

In simple terms, using the strategy of long-lasting value delivery could help you avoid companies that are vulnerable in recessions like JG Wentworth.