With shares in Quindell (LSE: QPP) falling by 37% since the start of July, the company felt that it needed to make a statement in an attempt to reassure the market regarding its future prospects. Indeed, todays release by the company states that it knows of no reason for the recent share price fall and expects to release results for the third quarter, as planned, on or before the 15 October.
Certainly, shares in Quindell have reacted positively to the statement and are up 5% on the day at the time of writing. However, could this really be a turning point? And, perhaps more importantly, is Quindell worth buying right now?
A Lucrative Business
On the face of it, Quindells business model is hugely lucrative. For example, in the last two years alone it has grown earnings per share (EPS) by 99% and 74% respectively. Furthermore, it is forecast to increase EPS by 43% in the current year and by a further 50% next year.
Such numbers should demand a sky-high valuation but, in Quindells case, they dont. For instance, the company trades on a price to earnings (P/E) ratio of just 2.6, which is incredibly low and suggests that the market is fearing either downgrades to forecasts or negative news flow over the short to medium term. Hence the release of todays statement, which indicates that Quindell is progressing as normal and is looking ahead to reporting quarterly numbers as planned in mid-October.
However, as all Foolish investors know, weak sentiment is tough to shake off. In other words, once the market views a company in a negative light, it can produce a snowball effect that can last for some time.
The publication from Gotham City Research earlier this year did little to improve the markets view of Quindell, with suggestions being made of poor earnings quality and dubious revenue recognition policies. Since then, sentiment has never really recovered, in spite of Quindell winning a libel ruling against Gotham City Research and releasing a set of half-year results that appeared to show the company was delivering on its medium term targets.
While todays release is undoubtedly good news for investors in Quindell, it may not be enough to turn the tide of negative sentiment against the stock. Certainly, it is a good start, but Quindells share price and valuation have fallen so much that it seems as though the market is looking for a sustained chain of results that show the company has sufficiently strong cash flow to stay in business in the long run.
Until this is fulfilled, Quindells share price could well remain downbeat. As a result, potential investors may wish to wait for further results before deciding to add a slice of the company to their portfolios.
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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.