Quindell (LSE: QPP) shares fell by 20% when markets opened this morning, before recovering to trade around 5% lower.
The trigger for the fall appears to have been a news release issued after markets closed last night, showing that institutional investor Toscafund had reduced its stake in Quindell.
Whats happened?
On 7 January, Quindell reported that Toscafund had taken a 5.4% stake in the insurance outsourcer.
Yesterday, Quindell said that Toscafund had reduced the size of its holding by nearly 10%, taking the funds stake in Quindell down to 4.9%.
As always in these scenarios, we dont know why Toscafund has sold, nor do we know the price the fund paid when it bought and sold its shares.
Locking in a gain?
We dont know the facts, but I believe we can take a pretty good guess: we know that Quindell shares were trading at around 45p on 2 January, which was the day on which Toscafund crossed the 5% threshold (the transaction wasnt reported until a few days later, which is quite common).
Similarly, we know that Quindell shares were trading at around 73p on 10 February, the day on which Toscafunds holding fell back below the 5% threshold.
In my view, it seems reasonable to assume that by selling, Toscafund was locking in a profit on some of its shares, ahead of the PwC report into Quindells accounting policies, which is due at the end of February.
Good news or bad?
On the face of it, Toscafunds decision to reduce its holding ahead of the PwC report isnt exactly a vote of confidence in Quindells management.
However, my estimate of Toscafunds buy and sell prices suggests the fund could have made a 62% profit in just over a month. Given this, and the funds responsibility to its investors, locking in some of these profits was simply good investment practice.
There is a real risk that the PwC report will uncover serious problems at Quindell. The reason I believe this is that the firms banks and auditors were the ones who requested this review given their inside view on Quindells financial situation, I reckon their concerns should be taken seriously.
Buy or sell Quindell?
I wouldnt be surprised to see Toscafund sell more of its Quindell shares ahead of the publication of the PwC report later this month.
In my opinion, Quindell remains a sell at todays price, as the risks of a nasty surprise are simply too high.
Of course, you may not agree with my view — and I would always suggest doing your own research before making any investment decision.
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Roland Head 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.