Shares in Quindell (LSE: QPP) continue to be among the most volatile in the UK stock market. For example, they are down 19% today and, since the turn of the year, are in the black by 70%. In fact, their range over the last month has been spectacular, with them reaching a high of 125p having started the year at just 46p.
Today, they trade at 68p and, with all the volatility, news and rumours that surrounds the company, can it really be considered anything more than a short term trading opportunity? In other words, is Quindell really a sound long term investment, or is it a highly volatile bet that could double/lose half of your money within days or weeks?
Short Term Opportunity
As well as having extreme volatility, Quindell appears to be a short term opportunity because it seems to be somewhat rudderless at the present time. That’s not to say that its new management team is doing a poor job; they have only been at the company for a short time, after all. However, what it does mean is that for long term investors it is difficult to judge exactly where Quindell will be in even a year’s time, since its strategy remains unclear – and that makes it difficult to invest in.
For example, there are rumours regarding the break-up of the company and the sale of specific assets. However, it appears as though Quindell has sufficient cash to operate in the short to medium term (as highlighted in its recent update), so the idea of selling off assets without an overall long term strategy could be viewed as rather difficult to understand and difficult to invest in.
Furthermore, Quindell also has the outcome of an independent review into its account practices due out soon and the outcome of this is a known unknown. In fact, the verdict of the review has the potential to make a huge impact on the company’s share price and, as such, this adds further weight to the view that Quindell is a short term trade, rather than long term investment.
Long Term Investable Business
Despite this, Quindell remains a very profitable company that trades on an extremely low valuation. For example, it has a price to earnings (P/E) ratio of just 1.8 and, looking ahead, is forecast to increase pre-tax profit from £107m in 2013 to £463m in 2016. If met, that would be a stunning rate of growth and show that Quindell remains a high-growth company with highly appealing niche products.
Furthermore, Quindell’s current valuation, it could be argued, is fully reflective of the uncertainty regarding the accounting review and its future strategy. As such, it appears to have a very wide margin of safety that could also price in further short term volatility, thereby making Quindell a relatively appealing long term investment opportunity.
Looking Ahead
Clearly, Quindell’s share price is likely to remain highly volatile in the short run and this provides the opportunity for short term traders to make a quick return. So, in that sense, Quindell is short term play. However, it also offers a significant margin of safety and, if it can meet its forecasts, then it could prove to be a superb investment. Therefore, it also could be classed as a long term investment opportunity.
However, for most long term investors, the degree of volatility and risk could simply be too high and, as a result, only the least risk averse may wish to buy a slice of Quindell at the present time.