Quindell (LSE: QPP) shares fell by 20% when markets opened this morning, before recovering to trade around 5% lower.
The trigger for the fall appears to have been a news release issued after markets closed last night, showing that institutional investor Toscafund had reduced its stake in Quindell.
What’s happened?
On 7 January, Quindell reported that Toscafund had taken a 5.4% stake in the insurance outsourcer.
Yesterday, Quindell said that Toscafund had reduced the size of its holding by nearly 10%, taking the fund’s stake in Quindell down to 4.9%.
As always in these scenarios, we don’t know why Toscafund has sold, nor do we know the price the fund paid when it bought and sold its shares.
Locking in a gain?
We don’t know the facts, but I believe we can take a pretty good guess: we know that Quindell shares were trading at around 45p on 2 January, which was the day on which Toscafund crossed the 5% threshold (the transaction wasn’t reported until a few days later, which is quite common).
Similarly, we know that Quindell shares were trading at around 73p on 10 February, the day on which Toscafund’s holding fell back below the 5% threshold.
In my view, it seems reasonable to assume that by selling, Toscafund was locking in a profit on some of its shares, ahead of the PwC report into Quindell’s accounting policies, which is due at the end of February.
Good news or bad?
On the face of it, Toscafund’s decision to reduce its holding ahead of the PwC report isn’t exactly a vote of confidence in Quindell’s management.
However, my estimate of Toscafund’s buy and sell prices suggests the fund could have made a 62% profit in just over a month. Given this, and the fund’s responsibility to its investors, locking in some of these profits was simply good investment practice.
There is a real risk that the PwC report will uncover serious problems at Quindell. The reason I believe this is that the firm’s banks and auditors were the ones who requested this review given their inside view on Quindell’s financial situation, I reckon their concerns should be taken seriously.
Buy or sell Quindell?
I wouldn’t be surprised to see Toscafund sell more of its Quindell shares ahead of the publication of the PwC report later this month.
In my opinion, Quindell remains a sell at today’s price, as the risks of a nasty surprise are simply too high.