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Is Quindell PLC’s 100% Gain In 3 Days More Than Just A ‘Dead Cat Bounce’?

The last three days have been nothing short of spectacular for investors in Quindell (LSE: QPP). That’s because shares in the company have more than doubled from a low of 41p to their current price of 85p.

Of course, the exceptional rise comes after months of share price falls. Indeed, shares in Quindell have been heavily shorted, with the identity of a major short seller being recently revealed as Tiger Global, and have fallen by a whopping 81% since the turn of the year.

As a result, could the recent rise be a result of the closing of short positions, in other words a ‘dead cat bounce’ (so-called because after a huge fall, even a dead cat would ‘bounce’)? Or, is this the start of a more prolonged rally in Quindell’s share price?

Turbulent Times

After such vast changes in recent weeks, Quindell is apparently reassessing its strategic options. Indeed, its long-term strategy is perhaps unlikely to be decided any time soon, since its Chairman has resigned and its CFO is due to leave next year. As a result, there seems little to gain from temporary management making major decisions about the company’s long-term future, since there is a good chance they will be altered by a new management team with new ideas.

However, the short term is an important focus for current management, and it appears as though they are not desperate for cash. This has continually been a fear of investors in the stock, with doubts being raised in recent months regarding Quindell’s business model and, in particular, whether it will require a cash injection over the short to medium term. Despite rumours of a sale of Quindell’s 25% stake in Nationwide Accident Repair Services, the company released a statement to say that it is not actively seeking to sell its shares in the company. This should give investors in Quindell a degree of confidence regarding the company’s short-term prospects, and means that a fire-sale of assets seems less likely.

Looking Ahead

Of course, Quindell remains a highly profitable business that has delivered superb bottom-line growth in recent years. For example, in the last two years, earnings at Quindell have grown by 99% and 74% respectively and, over the next two years, the company’s bottom line is forecast to grow by 46% and 45% respectively. Even if such strong growth rates are not met, Quindell’s current share price seems to include a significant margin of safety, with it having a price to earnings (P/E) ratio of just 2.2 using last year’s earnings per share.

Indeed, on paper Quindell seems to be a highly appealing buy at its current price level. Certainly, it is experiencing a period of turbulence, with a new management team yet to be appointed, an LSE investigation ongoing, and investor sentiment being highly volatile after a disappointing period.

Clearly, many investors will look at the valuation of Quindell alongside its future prospects, and decide that the risk/reward ratio is very much in favour of buying a slice of the stock. However, and despite recent share price strength, longer term investors may wish to wait for further details regarding the longer-term prospects for the company (as well as short-term progress) before buying shares in Quindell. After all, three days of exceptional gains doesn’t change the outlook for any company over the medium to long term.

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Peter Stephens 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.