LONDON -- One of Warren Buffett's famous investing sayings is, "Be fearful when others are greedy and greedy only when others are fearful." Or, in other words, sell when others are buying, and buy when they're selling.
But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.
So, in this series of articles, we're going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.
Quindell Portfolio (LSE:WTG) is something of an enigma. Ten days ago, it revealed what seemed, on the face of it, some spectacular results in its annual financial report for 2012 -- revenue up 904%, gross sales up 1,154%, and pre-tax profit up 915%.
But while its share price is almost 40% higher than this time last year, it's currently 45% lower than at the start of 2013. In addition, only a couple of days after publishing its annual results, it had to issue a "clarification regarding press speculation" about people shorting the company's shares, saying that it "knows of no valid reason for the recent share price decline," and that Quindell "has a strong balance sheet and continues to trade profitably." Much like the Prime Minister expressing "complete confidence" in a beleaguered party colleague, that sort of announcement can often have the opposite effect.
Some people seem to agree that the sell-off has been unwarranted, since Quindell was in the No. 3 spot in the Fool's latest "Top 10 Buys" list.* But it's not exactly obvious why they might think Quindell represents a good investment opportunity.
As mentioned, the company's latest annual results certainly sound impressive. But most of the company's revenue, and therefore its growth, comes from a variety of its software-related operations -- initial license fees, consulting fees, management charges, membership fees, e-commerce revenues, click fees, and other success-based one-time fees -- and that income has largely only come by spending money to acquire the companies that deliver it. So, because of its strategy of growth through acquisition, it's arguable that Quindell has merely bought growth rather than generated it organically.
True, a series of one-time expenditures to acquire quality companies that will continue to provide increasing revenue year on year would probably be considered money well-spent by shareholders. But it's not at all clear exactly where the current revenue is coming from, so it's very hard to say whether last year's apparently stellar growth was a true reflection of what's sustainable, let alone if Quindell will be able to increase it to "deliver hundreds of millions of recurring revenue per annum," as the company claimed in its annual report that it has the potential to do.
Some of the ways Quindell has financed its purchases are less than transparent to the average shareholder -- for example, using an equity-derivative swap contract to fund the acquisition of Accident Advice Helpline. That sort of thing makes it very hard for most people to understand a company's finances well enough to base an investment decision on. Hopefully, that's not the case with the people who put Quindell in our "Top 10 Buys" list, but this is one occasion when I think I'd share the fears of others.
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*Based on aggregate data from The Motley Fool ShareDealing Service.