Shares in Quindell (LSE: QPP) have endured a torrid time in recent months, with weakening sentiment causing them to fall by 80% since their high at the start of April.
Indeed, many investors are concerned about the cash flow of the company, with doubts being cast regarding revenue recognition practices at the firm.
However, shares in Quindell are up 5% today after significant director buying. With them trading at their lowest point since May 2013, is now the time for you to follow the directors and buy a slice of Quindell?
Often, director purchases are relatively minor amounts and, as a result, do not make a significant impact on a companys share price. However, todays purchases by Robert Terry, Chairman, and Stephen Scott, a non-Executive director, are relatively large amounts at 1.2 million and 650,000 respectively.
They mean that Robert Terry now owns 10.69% of Quindell, while Stephen Scott owns 1.29% of the company. This should be seen as a positive for investors, since their financial futures are relatively closely tied to the future success of Quindell, with Finance Director, Laurence Moorse, also purchasing around 60,000 of shares in Quindell today to up his stake to a not inconsiderable 0.29%.
To fund the acquisition of shares in the company, the directors have entered into a loan facility that may result in the transfer of their existing shareholding in Quindell as security. They are required to redeem the transferred shares at maturity when the loan is repaid at the end of the two year term.
Commenting on the share purchases, Robert Terry stated the following: As demonstrated by the purchases made by some of the board today and recently by other members of the board and executive team, we believe the current market valuation of the Company is materially below its true value.
This is a key point for investors and potential investors since, on the face of it, Quindell appears to be grossly undervalued. For example, it currently trades on a price to earnings (P/E) ratio of just 2.4 and according to its most recent results, appears to be performing extremely well. Indeed, earnings growth of 46% is forecast for the current year, with a further 45% being expected next year. Such strong growth rates put Quindell on a super-low price to earnings growth (PEG) ratio of just 0.1.
As highlighted, the company in on-track to meet its current guidance for the full-year. However, even though shares in Quindell are up 5% today, the market appears to have doubts regarding its future prospects. If it did not, Quindell would be trading on a P/E ratio of considerably more than 2.4, for instance, and its share price would simply not have declined by 80% since the start of April.
Although the purchase of a significant amount of shares in Quindell is undoubtedly very positive news for investors and is likely to help sentiment in the short run, the market seems to be waiting for confirmation that the company has sufficiently strong cash flow to operate successfully over the medium to long term. Therefore, until results show this to be the case, director buying is unlikely to shift sentiment significantly. This means that it may be worth waiting for a little while longer before buying your very own slice of Quindell.
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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.