Beginners’ Portfolio: Was I Right To Buy Quindell PLC?

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The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for. Transactions made for the portfolio are for educational purposes only and do not constitute advice to buy or sell.

quindellSince I added insurance outsourcer Quindell (LSE: QPP) to the Beginners’ Portfolio on 26 June, I’ve been plagued with worries that I acted rashly. Most people would recommend slow and careful consideration before plonking down the cash. And I’d agree — mostly.

Had I penned these words last Friday as I almost did, I would have rued the price fall that hit Quindell after our purchase. The shares ended that day on a mid-price of 181p, already down 8% on our purchase price of 196.5p (without considering the full spread and dealing costs).

Strong first half

But then, on 14 July, we saw Quindell’s first-half pre-close trading update, and I was relieved to read the news of what I consider its greatest weakness — cash flow. Profits have been looking good, but debtors were building up and converting those profits into the folding stuff had been proving difficult.

But we heard of “Adjusted operating cash flow for the half year ahead of expectations and guidance with circa £51 million outflow compared to original guidance of £60 million outflow during planned significant growth in H1“.

Net cash was also “ahead of plan at circa £84 million“, with debt financing standing at around £60m.

All of this came from a more-than-doubling of gross sales in the period to £362m.

Ongoing growth

Acquisitions are continuing, with the integration of Himex Limited and ingenie Limited going well. Rapid expansion by acquisition is largely what led to Quindell’s failure to secure a full-market listing. But I still see it as naivety rather than anything more sinister, and we had news of a further beefing up of corporate governance with David Scott Currie joining as a new non-executive director.

This comes after the news that Fidelity has doubled its stake in Quindell, and now owns 10% of the company.

Following on from the initial fall, Quindell shares have bounced back — they’re currently at a mid-price of 224p, which is 14% ahead of our buy price. Does that make me feel smug? No, not a bit of it.

Still high risk

Quindell was, and still is, a high-risk investment. I’d been following the company and liked it, and I saw the dip in response to the listing failure as an opportune moment to risk a bit of cash. And even after investing in shares for more than 20 years and moving more and more towards a ‘Safe is best’ strategy, I still reckon there’s nothing with an impulsive growth share purchase from time to time — so long as it’s backed by a well-diversified portfolio.

Quindell could still go badly wrong, but if it goes right then I think the portfolio will benefit handsomely.

Update: Since writing these words, the Quindell price has fallen back to 192p — I’m glad I wasn’t smug.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool owns shares in Tesco.