Shares in RBS (LSE: RBS) (NYSE: RBS.US) and Quindell (LSE: QPP) have disappointed somewhat over the course of the last year, with the former being down 5% and the latter seeing its share price decline by 48%. Of course, the reasons for this are very different, with RBS continuing to suffer from poor investor sentiment in the wider banking sector and Quindell seeing considerable short selling during the time period.
Has this caused them to be among the cheapest stocks around? And, more importantly, should you buy them?
Despite returning to profitability in 2014 and being set to follow this up with a much improved bottom line in the current year, investor sentiment in RBS remains very poor. For example, it trades on a price to book (P/B) ratio of just 0.67 and there appear to be two key reason for this.
Firstly, RBS remains majority government-owned. Although the bank is clearly on the road to recovery and does not really need the government to prop it up anymore, the market is well-aware that over the next few years the majority of RBS’s shares will be sold. This could be in the form of a sale to institutional investors, or as has been the case with Lloyds, could involve the stock being drip-sold on the market. The problem, though, is that the government is making a loss at the current share price and so, there appears to be something of a stalemate at the present time.
Secondly, RBS is being hurt by regulatory actions across the banking sector. In fact, RBS has been the subject of fines and allegations of wrongdoing in the last year and this is unlikely to help to improve investor sentiment. Looking ahead, it seems likely that there will be further issues in the short run, since there remain questions to be answered by the wider sector, but in the long run it seems unlikely that banks will continually be fined at the levels that they have been in recent years.
For Quindell, short selling has been a key reason for its share price demise. In fact, since the report by Gotham City was published over a year ago, multiple hedge funds and other major investors have shorted the company’s shares and sent them tumbling. And, despite one of the main reasons for shorting Quindell being doubts surrounding its accounting policies and cash flow situation, an independent report by PwC found that Quindell’s accounting practices were acceptable.
Today, with its professional services division having been agreed to be sold off, Quindell appears to have little excess value according to the market. In fact, it has a market capitalisation of £560m, while its professional services division is being sold for £637m. Certainly, there are liabilities to deduct from that figure, but it indicates that the telematics and insurance technology business that Quindell is set to become is priced to sell in the market.
While RBS’s short term future may be weighed down by government share sales, it appears to be well-worth buying right now. It seems to have the right strategy, is improving its profitability, is set to benefit from an improving economy and trades on a very appealing valuation. And, while further regulatory action could hold the banking sector back, it is unlikely to last over the medium to long term, thereby holding the promise of improving investor sentiment moving forward.
Meanwhile, Quindell may be cheap, but it is essentially starting again as a business. Its professional services division made up the vast majority of its focus and, as history shows, starting over can be tough once your main asset is sold off (and key members of the management team leave with it). As such, Quindell appears to be a stock to watch, but not to buy, at the present time.
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Peter Stephens owns shares of Lloyds Banking Group and Royal Bank of Scotland Group. 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.