On the face of it, Quindell (LSE: QPP) appears to be a rather appealing investment. That’s because it trades on a dirt cheap valuation and has delivered stunning earnings growth in recent years.
For example, Quindell has a price to earnings (P/E) ratio of just 2.5 and has been able to increase its bottom line by 149% and 74% in each of the last two years. This is a stunning rate of growth and, when combined with such a low P/E ratio, should mark Quindell out as ‘screaming buy’ at the present time.
Challenges
The problem, though, is that Quindell is not a ‘screaming buy’ at the moment. It is facing a period of considerable uncertainty, with the outcome of the ongoing independent investigation into its accounting practices being a major drag on its share price performance. In addition, a new management team, distrust among a number of investors, and a business model that is viewed as high risk (in terms of the delay in receiving cash following investment) have also caused its performance to be somewhat underwhelming.
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Strategy
Perhaps more importantly, though, is that Quindell seems to lack a clear and coherent strategy. In fact, it appears to have expanded too far and too fast in recent years, with divisions such as property services and its investment in National Accident Repair Services ultimately leading to disappointment. As such, the new management team is intent on rationalising the business and plans to sell off large swathes of it, which could leave Quindell as a leaner, more efficient and more focused entity.
This seems to be a very sound strategy but, due to the severe decline in investor sentiment over the last year (Quindell’s shares have fallen by 82%), it will inevitably take time to come good. The difficulty the company faces, of course, is that its financial position may not afford it the time it needs to make the necessary changes to its business – especially if the independent review delivers anything but a clean bill of health with regard to the company’s financial standing. In addition, investors in the company are understandably impatient for it to make further headway following its promising start to 2015 and further declines in Quindell’s share price could put it under even more pressure in the short run.
Looking Ahead
As such, and while a sound strategy could cause Quindell’s share price to jump considerably higher (even if it were to quadruple it would still trade on a P/E ratio of just 10), it may not have sufficient time to implement it. Therefore, it appears to be a stock that is worth avoiding at the present time – especially when there are a number of other much more appealing turnaround stocks on offer.
