Quindell, Punch Taverns and Interest Rate Rises

THE WEEK: Rodney Hobson urges investors to sell off their junk shares and highlights the interest rate rebels at the Monetary Policy Committee voting for change

Rodney Hobson 22 August, 2014 | 2:40PM

These have been exciting times at Quindell (QPP), which provides services to, or should that be against, the insurance industry.  The share price has been all over the place, presenting great opportunities for those who like short term gambles, but somewhat frightening for steady long-term investors like myself.

Quindell arranges lawyers, car hire and repairs, and medical checks when insurance claims are made. I’m always doubtful as to whether such companies smooth the flow or simply add to costs but that doesn’t affect the investment case.

The AIM-quoted company effectively buys injury claims from insurance companies, does the work and claims back the costs at the end, which could be anywhere between six and 18 months later. It sounds rather risky to me and it is difficult to foresee future earnings as cases may not be settled to Quindell’s satisfaction.

Hence the stock market’s reaction to this week’s first half figures, with a 300% leap in profits prompting a further fall in the already battered shares. The shares have been heavily shorted and there will be upward bounces as short sellers close their positions. I would regard any such upward movement as an opportunity to cut your losses.

This is far too high risk for me.  Stay well clear and don’t feel envious if those who buy in now eventually make a killing. They will have earned their profit in sleepless nights and bitten finger nails.

Time to Sell this Share?

Shares in Punch Taverns (PUB) are incredibly trading at just over 9p a share despite all the warnings over many months that they are probably worthless. If you have been stupid enough to hang on to them, or to buy them in the mistaken hope of recovery, this is probably your last chance to get out with something, however little.

Punch has been systematically destroying its own business by squeezing its tenants until the pips squeak and has been so intent on spreading misery that it borrowed more than it could afford to service, let alone repay. There is no possibility of striking a deal with creditors that does not involve wiping out existing shareholders.

Meanwhile there is no dividend and no prospect that there will ever be one.  The business model is hopelessly flawed.

Interest Rate Rebels

Two members of the Bank of England’s committee that sets interest rates have at last broken ranks and voted for a quarter point rise after three years of unanimity. It is not the split that is surprising but the fact that two members rather than just one voted for an increase.

I was with the majority of economists and commentators in expecting members to switch from doves to hawks cautiously, and the fact that two of the five votes needed to increase interest rates are already in the bag bring the day of reckoning nearer. Those two votes will stay firm month after month until more members are persuaded.

Having pinned my flag to the February mast I am not yet changing my view of when the first rate rise will come but I am ready to reconsider. November just moved a little nearer.

This is a timely reminder that Bank Governor Mark Carney’s forward guidance is simply guidance, not chapter and verse. He can be outvoted on the committee, as his predecessor was occasionally. Forward guidance would take a big step forward if the Bank started to release the voting figures immediately after the meeting instead of two weeks later.

The vote split was taken very well by the stock market, where an interest rate rise is usually seen as bad news. In the present case it will be a sign that the economy is getting back to normal.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Punch Taverns PLC  -
Quindell PLC91.00 GBX-1.09-

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, most recently The Dividend Investor.

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