Quindell (LSE:QPP)is not that attractiveat 128p a share, I think, butBlinkx (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 easilyreward 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. Thats 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 hasnt been tested as yet, while Blinkx is a textbook example of a company operating in a very competitive sector, where swift changes are necessaryin 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 doesnt mean all risky assets are the same, however.
Quindells stock price has been stagnant over the past eight weeksis 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 hadagreed the sale of its professional services unit to Australian law firmSlater & Gordonforabout 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 capitalto 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 Quindells 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 its 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, whichsimply 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, whiletrading 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 arent 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 shouldbe able to withstand the financial pressure, and I wouldassume that its acquisition-led strategy will start to pay dividends sooner rather than later.
In conclusion, I’d avoid Quindell and the FTSE 100, but I’d add exposure to Blinkx as part of a diversified portfolio, and I’d also consider asmall-cap stock whichcould certainlyattract interestfrom value investors following a stellar performance in recent years.
This fast-growing value playwith ‘breathtaking’ potentialhas been selected by our Motley Fool analysts in their latest research, which is free right now. Here, you’d buy the shares of a company whose profitability is rising and whose balance sheet is strong. Furthermore, its valuation points to possible capital gain of up to 30% or more from its current level, based on fundamentals.
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