Quindell (LSE: QPP) is one of the most popular and controversial AIM shares, whose merits are hotly debated on bulletin boards. So news that giant investment firm Fidelity has doubled its stake in the company is significant. Quindell’s shares have risen 20% on the news.
The US arm of Fidelity now owns 10% of Quindell, only just shy of founder Robert Terry’s 10.9%. With 7% of the company also held by M&G, does this institutional backing give Quindell the respectability that its critics have questioned?
It’s a powerful vote of confidence: the increase in Fidelity’s holding would have involved a fair degree of due diligence. But with Quindell’s market cap around £1bn, Fidelity’s £100m stake is still a drop in the ocean to an institution which measures its funds under management in the trillions.
Asymmetric
Quindell is a high risk/high reward share that, for bulls, is a fabulous opportunity; for bears, it’s a disaster waiting to happen. For most investments, the debate is one of degree: “Will demand for ARM‘s chips keep growing fast enough to justify its valuation?”, or “Can Marks and Spencer turn around its fashion business?”. In contrast, the bull and bear cases for Quindell are asymmetric.
Bulls point to:
- Rapid growth through acquisition;
- A potentially paradigm-shifting business model, introducing technology to revolutionise a fragmented and inefficient sector;
- Commanding market share in some businesses;
- Entrepreneurial management, now migrating to a more normal board structure.
Bears focus on:
- Questions over accounting, including margins above industry norms and relatively low cash flow;
- Poor to opaque investor communications;
- Management’s previous involvement with The Innovations Group, a high-growth tech firm whose share price subsequently collapsed.
Volatility
This asymmetric investment case is fuel to the fire of investment boards, and amplifies the wild volatility in the share price. Perhaps the most significant effect of Fidelity’s investment will be that, with more of the shares held by core investors, there will be less of the volatility that attracts short-sellers (currently 5% of market cap).
The debate is fascinating, but I prefer to stand on the sideline rather than put my money either way. For me, Quindell is in the ‘too difficult’ pile. Better an opportunity missed, than money lost.