Real-Life Investing: Quindell PLC And The Shorters

It’s that old, familiar feeling. You’ve just bought into a company, and the share price has been rocketing. You always thought this company was a bargain, and until now you have felt that warm glow of vindication.

But suddenly things fall apart…. under attack from shorters, the share price crashes through the floor, halving in a matter of days. You have a knot in your stomach, and an uneasy feeling in your heart, somewhere between worry and pure, blind panic. Should you sell now, and preserve at least some of your money? Your finger hovers over the sell button….

Shorting is commonplace

As I have a personal holding in Quindell (LSE: QPP), I watched with interest the recent events surrounding the report from Gotham. This had all the hallmarks of a co-ordinated shorting attack. So what will I do? Panic sell my holding? Of course not — I will be buying some more.

You see, shorting activity is very common with growth stocks. It is very difficult to short blue-chip giants such as Shell or Unilever: there is just too much liquidity to make shorting feasible. But the trading volumes of a small or mid cap mean that it can be shorted.

Warren Buffett has often said that if something was marked down in the supermarket then you would buy plenty of it, and that is exactly the same principle that should apply to investing. This is contrarian investing.

For growth shares, shorting attacks often provide investors with buying opportunities. In fact, Quindell was also shorted last year. In May 2013 the company’s share price crashed through the floor, falling as low as 5p. That time there was no investor or media reaction, presumably because very few people knew about the company.

stock exchangeOne of the buying opportunities of the year

The company had been on my watchlist, and I snapped up the shares at 12p — not at the bottom, but close enough. A year later the share price had rocketed, and my holding had tripled in value. But I am so impressed by this company, I would like to buy some more. The recent share price fall provides, not a time to panic, but another buying opportunity. In this way, you turn what seems like adversity to something very positive.

Whenever a share price crashes, I will always check the fundamentals of the company. This is crucial — it is like the harness and rope that provide security when you are climbing a mountain.

Quindell is now on a 2014 P/E ratio of 6.3, falling to 4.2 in 2015. That is astonishingly cheap. These are only consensus estimates, but so far Quindell has been meeting or exceeding consensus targets.

So my view is clear: this is one of the buying opportunities of the year. Eventually, the inherent strength of Quindell will shine through, I feel. You just need a little patience.

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Prabhat owns shares in Quindell.