Quindell PLC: A ‘Story’ Stock Gone Sour

Quindell (LSE: QPP) has the usual characteristics displayed by the hottest of AIM stocks: a great ‘story’, the potential for lottery-like winnings, and a large herd of excited private investors posting on financial bulletin boards.

The Quindell story

Quindell joined AIM in 2011 by a reverse takeover. The business description in the admission document is one of the most nebulous I’ve seen. The main assets appear to have been an ‘intelligent’ technology platform that improves business processes, a database of over 30,000 small businesses and 200,000 consumers to which Quindell had permission to market, and a golf and country club.

Quindell’s future plans included leveraging its technology, cross-selling via permission-based marketing, and offering ‘indoor golf’ to other golf or leisure clubs on a franchise model.

Quindell intended to rapidly increase its presence in “potential high growth sectors, including leisure, telecoms, finance, insurance and legal”; and to do so by using its AIM listing to issue shares to acquire suitable businesses. Quindell would go on to acquire dozens of companies and assets in the next three years, leading to a near five-fold increase in its issued shares.

The Quindell story that captured the imagination of private investors crystallised around the company’s ‘game-changing’ model of handling personal injury claims in road traffic accidents and, more recently, noise-induced hearing loss claims. These have been driving massive growth in reported revenues and profits.

A story stock gone sour

Quindell’s shares reached a high of 656p last spring. But in April the company was subjected to a scathing attack by what was at the time a little-known US outfit called Gotham City Research.

Gotham alleged that up to 80% of Quindell’s profits were suspect, and compared the “conflicting qualities” of the business to those of Sino-Forest — a company that collapsed in 2012 following claims it was a “multibillion-dollar Ponzi scheme”.

Quindell’s directors vehemently denied Gotham’s allegations, countering that the report was part of a “coordinated shorting attack” on the company. Nevertheless, the shares dived, and have fallen pretty much relentlessly since, closing last week at 136p — almost 80% down from their spring high.

Muddy waters

The waters around Quindell are muddied by many things, including:

• The group’s myriad acquisitions are difficult to follow, and some are rather unconventional: for example, acquiring the services of consultants by having them set up shelf companies and buying the companies off them;

• The reasons for a rejection of the company’s application in June to move from AIM to London’s Main Market have never been fully explained;

• Quindell feels the need to do ‘teach-ins’ to attempt to explain its business model to analysts and investors — but I’m not the only one who’s sceptical about how the company will be able to get 350% of the previously known market for successful noise-induced hearing loss claims.

Quindell’s trading updates and management forecasts through the summer have been resolutely bullish, but have only managed to temporarily halt the relentless slide of the shares. The company’s latest release, today, speaks of “continued positive progress being made by the Group in respect of all key performance indicators including cash performance”. The shares are up 10p at the time of writing, but it remains to be seen whether this is just another dead cat bounce.

The performance of the shares since the Gotham report suggests many in the market — including me — are convinced there is something seriously wrong with Quindell. However, if it’s sceptics like me who are seriously wrong, investors buying at today’s price could be looking at a huge ‘multi-bagger’.