With shares in Quindell (LSE: QPP) having fallen by 88% in the last year, it is perhaps of little surprise that they now trade on an extremely low valuation. After all, even if they were massively overpriced a year ago, an 88% fall is likely to change that fact somewhat.
However, what is perhaps unusual about Quindell is that its results and forecasts continue to be relatively upbeat. For example, it is expected to report a pretax profit of around £330m for the 2014 financial year and, if this is met, it would equate to the company trading on a price to earnings (P/E) ratio of around 1.2, which is insanely low and makes Quindell an extremely cheap stock at the present time.
Cash Flow
Furthermore, Quindell’s management team recently stated that the company has sufficient cash flow to meet its current trading requirements and that the board remains ‘comfortable’ with the company’s current cash position. This should, in theory, put to bed any concerns regarding the company’s cash flow (which has been a major reason for the decline in investor sentiment in recent months) but, in Quindell’s case, it seems to have had only a limited impact on the company’s valuation.
Accounting Issues
In fact, investor sentiment seems to be relatively low because there is such uncertainty surrounding the company’s future. This centres on the outcome of an independent report by PwC that is due to be released imminently and which will focus on the accounting policies used by Quindell. If it gives a clean bill of health then it is likely that Quindell’s share price will surge, but anything else could send Quindell’s share price lower as investors are likely to become concerned regarding the results and forecasts for the company, thereby putting its value as a going concern in some doubt.
Management Mistrust
There also appears to be a distrust of Quindell’s management by a number of its investors. This has carried over from the way in which previous management’s share dealing activities were communicated, and the share options granted to new board members have also left many investors feeling somewhat uncertain regarding the long term potential of the business.
Looking Ahead
Clearly, Quindell is an incredibly cheap stock based on its current P/E ratio of 1.2. However, there is good reason for it to be so low, since the numbers on which it is based are being subject to an independent review and, as such, they could change over the next few months. And, with investor sentiment being so low due to uncertainty regarding the company’s long term future, it seems unlikely that Quindell’s rating will be subject to a significant upward readjustment in the short term.
As such, and while Quindell may appear to be the cheapest stock in the world, now does not seem to be the right time to buy it, simply because the current level of risk is too high. While it is certainly worth watching, there appear to be better opportunities to make a profit elsewhere.