Why Shares In Quindell PLC Plummeted

Quindell PLC (LON: QPP) has rebuffed allegations against its activities. Who should you believe?

Mark Stones

Mark Stones (TMFMumbojumbones) joined The Motley Fool in 2014 and initially worked as a writer for Fool.co.uk, before joining the Fool’s analyst programme. Mark earned a BA in English from Loughborough University. Although he spends more time reading annual reports than Russian literature these days, he still appreciates a novelist’s antipathy toward the accepted view, which is a useful attitude when trying to sniff out hidden gems on the stock market. His approach to investing has been largely influenced by the principles of Warren Buffett and Peter Lynch. He also takes a special interest in the work of healthcare companies. Outside of investing, Mark plays guitar, enjoys good writing and has a guilty passion for combat sports.

Published 25 April, 2014 2:10 pm BST

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: Shares in Quindell (LSE: QPP) were down 15% in early trade after spreadbetting proponent Simon Cawkwell called for Quindell’s activities to be investigated by the FCA.

Given that Cawkwell has a short position in Quindell, it’s best to regard his motives with a healthy dose of scepticism (unlike investors with a long position in Quindell, if the stock goes down a shortseller banks a profit).

Since this morning Quindell has unveiled a detailed response to this week’s Gotham report, which alleged Quindell’s shares, which in the year to the firm’s 2013 results had surged 202%, were worth little more than 3p.

So what: The shares have since settled at around 24p (2% down on yesterday’s close). The vice chairman of Quindell, Tony Bowers, has revealed the firm has initiated legal action “against those responsible for this coordinated shorting attack.”

In an effort to reassure investors a number of directors intend to purchase shares, pending regulatory clearance. Quindell, which had risen to become the second largest company on Aim, still intends to join the main market after trading hit “record levels” at the start of this year.

Now what: In its 2013 results Quindell announced a maiden dividend of 0.1p. An accusation from Gotham was that Quindell had no free cash flow and negative operating cash flow, which would raise doubts over any progressive dividend policy. Quindell rebuffed the accusation:

“Cash generated from operations after exceptional costs, and before interest and tax was £3.2 million (2012: £18.4 million). After tax and interest, the Group had an outflow of £8.9 million (2012: inflow of £18.4 million).”

This is what the Motley Fool’s Prabhat Sakya had to say on Tuesday, before Quindell shares tanked:

“Why am I so optimistic about this company? Because I think this company has a key stake in the future of insurance, specifically in the areas of insurance outsourcing and telematics-based insurance.”

Quindell is on a forward P/E of 6 falling to 4 in 2015. That’s a bargain valuation, but the decision to ‘buy’ — based on those ratings, today’s results and the wider prospects for the telematics industry — remains entirely your decision.