I wouldn’t advise anybody to buy or hold the shares of Quindell (LSE: QPP) and Monitise (LSE: MONI) right now. Here’s why.
What’s Left Of Quindell?
“Quindell, the insurance claims processor under investigation by Britain’s anti-fraud watchdog, said it has appointed Indro Mukerjee as its new chief executive,” Reuters reported today.
Does this piece of news make any difference to the QPP investment case? Quindell was a speculative trade at the end of last year, but ever since its stock has become less appealing.
Its current valuation is lower than the amount of cash that its shareholders may or may not receive from disposals in the second half of the year, while its business model is a jump in the unknown.
Now it’s time to focus on the lessons that we have learned from Quindell rather than on the opportunity to invest in its stock:
- Firstly, you’d do well to avoid companies whose growth rates are astonishing, according to their income statements, but whose balance sheets point to a much lower value for their shares.
- Secondly, you should ask yourself whether the business is actually cashing in the amount of money that it is owed — check out the operating cash flow statement for that information.
- Thirdly, you must always pay attention to the composition of the board, and its growth strategy.
Monitise Struggles
The problem with Monitise is that some of the biggest players in the world are its competitors, and the British group doesn’t seem to have the financial firepower to compete with them.
Are you interested in its shares now at about 2p above their lowest level on record, though? According to consensus estimates from Thomson Reuters, you’d be buying the stock of a company that is likely to grow revenues at a steep pace into 2017, but one that is not expected to generate any operating income for at least three years, during which period its aggregate operating losses could be as much as to £130m, or about three times its net cash position.
If that’s right, Monitise may run out of cash sooner rather than later, its overall funding requirements show, which means that it will have to tap shareholders to raise new funds or it will have to seek help from lenders, although this option carries the risk of high borrowing costs.
In fairness, its financial metrics provide little help in the determination of fair value, while its stock performance — at -83% this year! — does not suggest that Monitise is very cheap…
Nobody can firmly say why its share price has been incredibly volatile in recent weeks, falling from 9.9p on 7 July — the day before Visa Europe said that it would reduce its shareholding — to 4p in early August, only then to rise to above 7p a few days later. The stock currently trades at 5.6p. It’s likely that Visa started to offload part of its stake in the first half of July, but the shares are also being targeted by opportunistic traders, in my view.