Polygon, a prominent UK hedge fund, was caught on the wrong side of a short attack on the stock of Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) in April, leaving the fund’s returns close to flat on the month as a result. Year to date the fund is up 10.22 percent, according to a Polygon investor letter reviewed by ValueWalk.
Gotham research report led to Quindell’s stock slide
Polygon has been a long-term investor in the stock, making money on it “life to date” and was up in April when a scathing research report written by Gotham. The research report caught the eye of many in the hedge fund community, including Novus in their European Short Observer publication, as previously reported. ValueWalk first reported on Gotham’s Quindell research report April 28. In the report titled, “Quindell: A Country Club Built On Quicksand,” Gotham claims the company’s shares are worth no more than 3 pence. After Gotham released the report, Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) issued a 12,500 word rebuttal as news that Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) had just pulled out of a planned road show to pitch Quindell to US investors. The main points in the Gotham research highlight Quindell PLC having negative cash flow and rising debt, which Quindell says is due to investing in the future through research and development. The books of Quindell have been called into question, as an intriguing and obfuscating web of acquisitions and related party transactions raise questions regarding current management and board of directors.
Short Shorts in Quindell
Polygon maintains investment despite red flags
Polygon is a supporter of Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) and conducted their own “deep due diligence which highlighted many red flags.” For example, the Polygon report notes exponential growth, but no evidence of free cash flow to match. It also cites a CEO and management team with a previous history at a company they controlled (Innovation Group) that they also grew through acquisition. “But this time, our in-depth research convinced us that there were also differences to Innovation Group.” 
The red flags aside, Polygon had been a long term investor and didn’t believe serious issues were at play. Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) stock was up nicely in April until it’s value was cut in half in the wake of the Gotham research report.
Polygon, like many longs, was blindsided by the report and sounded a bitter tone.
“What we didn’t expect was a new short side research firm called Gotham (who appear to have been in business for less than two years and provide little transparency about themselves on their website) to publish a 74-page (in our opinion, highly sensationalized) dossier rehashing QPP’s historical red flags, and neglecting to mention any of what we feel are strongly mitigating factors such as the valuation and high-quality new business contracts which we have highlighted above,” Polygon wrote in their investor letter. “In fact, this report was not fact-checked with the company.”
Despite the negative publicity, Polygon maintains its position and belief in the company, saying “we believe the company is in the right place at the right time.” The report predicted that Quindell PLC (LON:QPP) (OTCMKTS:QUPPF)’s listing should move to the main market from AIM by June, and that it should be listed in the FTSE 250 by this September. The company, which currently has limited analyst coverage by larger brokerages and investment banks, “should start to attract wider research coverage once this occurs.” The Polygon report predicted the investor profile will become more institutional in its investor base and “will become better understood and less volatile.”
Polygon winners in April
On the positive site, Polygon noted Colonial, the Spanish real estate company which was one of our winning investments in April, completed its EUR 1.2 billion capital increase, which has reduced the loan-to-value of the company to a very comfortable and sustainable 40%. “The company is now appropriately capitalized in our opinion, and has gained some key anchor investors including the Qatar Investment Authority, as well as a core group of local shareholders being led by Spanish construction mogul Mr. Villar Mir.” Another Polygon holding in Meda AB (STO:MEDA-A), which traded higher by 17% during the month. The company had been approached by two companies for a potential acquisition, which was rebuffed by management. “We continue to hold the shares as they trade at a small discount to the peer group, the growth outlook for the company is attractive, and the potential for another takeover approach for the company is definitely a possibility.” The full letter is embedded below.
Polygon Investors' Monthly European Equity Essentials – Apr 2014 by ValueWalk
