If you had followed my advice, you’d have recorded a 35% pre-tax return on your Quindell (LSE: QPP) investment since 15 December.
Are you now wondering whether you should exit the investment?
I am not invested, and I wouldn’t double the bet if I already had a long position in Quindell. However, I’d keep Quindell shares in my virtual portfolio, betting on a price target of 86p a share. Here’s why.
Is It Safe?
A gentle reminder: Quindell is a highly speculative and volatile investment, as I said before.
Should you buy the stock today at about 50p, don’t forget to have a plan that entails the inclusion of up to 10% of Quindell shares in a properly diversified portfolio, comprising either stocks or bonds paying a market-beating yield north of 4%.
This way, you’ll still fall on your feet in the (unlikely, in my opinion) event that Quindell goes belly up.
Cash And Cash-Like Items
Based on the trailing value of short-term assets such as cash and receivables, and assuming Quindell’s gross cash position has halved year-on-year while short-term credits have risen 50% over the period, the stock would be fairly valued at 86p. This is a realistic scenario, in my view.
Quindell will also have to roll over exiting debt facilities, which would become easier if it shows its lenders that receivables are promptly collected. Well, a significant improvement in working capital doesn’t seem very likely, does it?
So, Quindell must find alternative ways to secure funding between now and April, when its first refinancing round is due.
On 2 January, the stock rallied as the company said that cash generation remained a top priority, and initiatives aimed at freeing up cash were being pursued, including the divestment of assets.
Quindell has entered “into exclusivity arrangements” with a third party, which may or may not lead to a deal.
Feeling Good?
While I do not believe that Quindell should feel very comfortable with its overall cash position, the company should be safe at least until debt maturities come due. Then, it may be able to approach its lenders stating interest in its assets at fair value. How good would that be?
Of course, if a fire sale of assets follows then hefty write-downs will ensue, as my colleague Alan Oscroft pointed out last week.
But if Quindell manages to extend exiting credit lines on convenient terms and/or finds buyers that can either finance or just promise to finance an accretive deal for Quindell’s assets, then Quindell could offer stellar returns to opportunistic investors in the next few weeks.
Is it a risk worth taking? Frankly, what’s going to happen next at Quindell is anybody’s guess, so I appreciate you may want to hunt for value elsewhere.