Are Quindell plc And Blinkx plc Set To Embarrass FTSE 100 Investors?

Quindell plc (LON:QPP) and Blinkx plc (LON:BLNX) are under the spotlight.

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Quindell (LSE:QPP) is not that attractive at 128p a share, I think, but Blinkx (LSE: BLNX) is a completely different story — give the latter time, and a valuation of up to 80p a share (for an implied upside of 100% from its current level) could easily reward your patience. 

It Is Time For Risk Takers

Steepening yield curves can render equity risk more attractive, or just less expensive in relative terms, particularly for companies that promise growth backed by solid financials. That’s not necessarily good news for the FTSE 100, but it spells opportunity for smaller entities whose shares have been battered in recent times. 

In this context, Quindell promises a new business model that hasn’t been tested as yet, while Blinkx is a textbook example of a company operating in a very competitive sector, where swift changes are necessary in order to survive. Neither Quindell nor Blinkx are investments offering stable returns, of course, but you should know that by now. 

Quindell Is Worth Its Current Market Price Right Now

Quindell is not too different a bet from one on the sovereign yield curve of a junk-rated country such as Portugal, which today issued short-term notes with negative yield for the first time on record. Appetite for risk doesn’t mean all risky assets are the same, however. 

Quindell’s stock price has been stagnant over the past eight weeks… is up or down the way forward, then?

On the face of it, the next few months will be very important for its shareholders — not least because they are owed up to half a billion pounds. On 30 March, when it announced it had agreed the sale of its professional services unit to Australian law firm Slater & Gordon for about £650m, Quindell promised capital returns of up to £500m. 

It also stated that “if the disposal completes, the company anticipates that, in order to make the return of capital to shareholders, it will be necessary for the company to undertake a reduction of capital as it is likely to have insufficient distributable reserves in order to return the level of capital expected by the board to be returned,” adding that the board expects the reduction of capital and initial return of capital to be made in the second half of 2015.

As such, capital appreciation is very unlikely to occur at least until August or later this year or in 2016. 

The reminder of its portfolio has been rumoured to have attracted interest for £60m. The shares trade at 128p, for an implied market cap of £570m, which leaves very little room for error if Quindell’s calculations about cash returns turn out to be wrong, or if nobody shows up for its remaining assets. 

Blinkx Remains A Strong Buy 

You may well wonder whether it’s time to divert your attention to Blinkx, which has risen significantly since mid-April, as I expected, in spite of a poor performance in the wake of full-year results on Monday.  

Following the release, which unsurprisingly showed declining revenues and profitability, the shares dropped more than 10% on Monday, which simply meant that investors had decided to lock in some profits, in my view. 

As Blinkx rejigs its business model away from desktop, its trailing financials suggest that the stock could have bottomed out, while trading multiples based on revenues point to bargain territory at 37p a share, where it currently trades. Of course, investors need more evidence of operational improvements, while other multiples such as those based on cash flows and earnings aren’t very reliable in the light of a recent plunge in profitability, but its cash pile offers reassurance into 2017, and represents 40% of its current market cap. 

Even assuming bigger pre-tax losses than £25m a year into 2017 — say, at $40m a year — Blinkx should be able to withstand the financial pressure, and I would assume that its acquisition-led strategy will start to pay dividends sooner rather than later. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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