After falling by 80% in 2014, Quindell (LSE: QPP) shares have climbed 50% during the first seven days of 2015.
The latest surge came this morning, when Quindell shares hit 62p after the firm revealed that Toscafund Asset Management has increased its stake in Quindell by nearly 2m shares, to 5.4%.
Should you top up your holding?
I’m not sure that private investors should rush to follow Toscafund’s example and add to their stakes.
Firstly, the Toscafund purchase took place on 2 January, when Quindell’s share price was around 45p — around 35% lower than today’s share price.
Secondly, we don’t know the average share price of Toscafund’s holding. It could be much lower than today’s share price.
Finally, the two Toscafund funds which have acquired the shares, the Tosca Mid Cap and Tosca Opportunity funds, are special situation funds. Last week’s buys may be part of a more complex plan to realise value from its Quindell investment. We don’t know.
What do we know?
On 8 December, Quindell informed the market that the firm’s founder, Rob Terry, had disposed of a further 25m Quindell shares, taking his stake in the firm under the 3% disclosure threshold.
On the same day, we learned that Quindell’s bankers and auditors had requested an independent review of its accounting policies and cash generation forecasts.
PwC was appointed to carry out this review, the results of which aren’t yet known. However, I think it’s reasonable to expect that the review will include some bad news, perhaps leading to accounting write-downs or reduced cash flow forecasts.
For sale
We also know that Quindell is now trying to sell parts of its business, and is in preliminary talks with possible buyers. However, I’d be very surprised if any buyer will make a firm offer before the outcome of the PwC review is known.
If the review highlights problems, then Quindell will be left as a distressed seller — and may be forced to accept very low offers in order to raise cash.
Isn’t this a turnaround opportunity?
Short-term traders who bought into Quindell at the end of last year have now made a killing.
However, there is so much uncertainty surrounding Quindell’s finances that I think the only safe thing for longer-term investors to do is to steer clear until we know more.
After all, a stock that’s risen by 50% in seven days is clearly very volatile — these rapid gains could easily be reversed over the next week or two.