The story of Quindell (LSE: QPP) has been a fascinating one. Whereas there is generally a consensus about whether a company is a worthy investment, Quindell divides people between those who think that the company is the greatest investment there has ever been, and those that think it is some form of scam.
A torrid time
At first sight, the appeal of Quindell is apparent: it is on one of the lowest P/E ratios of any UK share. And it is also one of the fastest growing companies in Britain. So thousands of small investors have bought into this firm. These investors have had a torrid time over the past year.
Early in 2014 this company could do no wrong. The share price rose to 600p, and was trending towards 700p. And then the share price fell. And fell. And fell. At one point it reached 25p.
How do people react when the share price of a company they have invested in tumbles? Well, they panic.
Really, what you should be keeping tabs on is not the share price, but the fundamentals – the profitability, the revenues, the growth rate. The share price is incidental to this; it will fluctuate depending upon the vicissitudes of people’s moods and thoughts.
The jewel in Quindell’s crown
But the reality is people follow the share price. The directors of the company saw the share price fall, and there was uproar. They could see the value the business represented, and that this was not shown in the share price. So they decided to sell the most valuable part of the company: its legal services unit. They were selling the jewel in Quindell’s crown.
Law firm Slater & Gordon offered £674 million for the unit. This is actually a knockdown price, but the company was in such a rush to raise cash this didn’t matter to them.
Now this sum is actually more than the total market capitalisation of Quindell. And there is still other parts of the company that remain, such as its telematics business. So the company is still cheap.
But I’m afraid investors will now need to be humble. This firm will not now make them as much money as they once thought.
The share price will rise. Investors should take their profits, and then move on to the next investment.
And what lessons can we draw from this story? Well, there are so many demons in this world. But they are all in your head.
Slater & Gordon will make an offer. Quindell will accept that offer. There is nothing to worry about.