A version of this article originally appeared on Fool.com.au
No words can describe the anguish felt by shareholders of Slater & Gordon Limited (ASX: SGH) who watched helplessly as their shares more than halved in price last Thursday.
The shares plunged to a low of 89.5 cents just after midday before ending the session at 94 cents, down an incredible 51.4% for the day. Theyve lost more than 69% over the last week and 88% since early April and are now trading below their 2007 initial public offering (IPO) price of $1 for the first time.
To put that in perspective, the market is now valuing the company at just $330 million, down from roughly $1.1 billion last week.
Here are five things you need to know:
- Existing concerns
Slater & Gordons share price had fallen dramatically before yesterday. This was the result of two separate investigations into its accounting activities; its controversial acquisition ofQuindell earlier this year (setting it back roughly $1.2 billion); and concerns about its book-keeping processes.
- Heavily Shorted
Slater & Gordon has become one of the most heavily shorted companies on the ASX (meaning investors are betting on the share price falling further). According to ASIC, 16.3% of its shares were shorted on 20 November, 2015, meaning any bad news is likely to have a dramatic impact on the share price.
- Proposed changes to personal injury law
With that in mind, yesterdays heavy decline came after the company released a market sensitive announcement. The company spoke briefly about proposed changes to personal injury law in the UK which, if implemented, would impact on the rights of people injured in road traffic accidents.
By increasing the Small Claims Track minimum from 1,000 to 5,000, the proposed changes couldstop small claimants from using lawyerson a no win / no fee basis. Instead claimants would have to apply directly to a defendants insurer.
Analysts are already sceptical whether the company can achieve its lofty earnings guidance, so yesterdays news couldnt have come at a worse time.
- Quindell
As if the Quindell acquisition hadnt caused enough angst amongst shareholders, the vast majority of earnings from the division (now known as Slater & Gordon Solutions, or SGS) come from road traffic accidents.
- Effect on earnings
Slater & Gordon said it doesnt expect there to be any impact on its performance this financial year (FY16), while it reiterated its guidance for $205 million EBITDAW (earnings before interest, tax, depreciation and amortisation, less the movement in work in progress). However, if the proposed changes are implemented, it could well have an impact on earnings in FY17 and beyond.
As highlighted by The Australian Financial Review, UBS expects a 33% decline in revenue in FY17 while EBITDA could fall by 43%. The AFR said UBS has also set a 90 cents price target on the shares.
Should you buy?
Slater & Gordons share price collapse has no doubt intrigued some investors keen to pick up a bargain. Although the shares might look cheap, there is still a multitude of uncertainty surrounding the company and its circumstances which could force the shares even lower from here.
In other words, an investment today would seem more like speculation which is a dangerous game to play.
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The original author of this article, Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest.
Neither The Motley Fool Australia nor The Motley Fool UK has aposition in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
To find out the strategies to adopt if you want tobecome one of the growing number of surprise UK millionaires, read this FREE Motley Fool report:’7 Simple Steps For Seeking Serious Wealth‘ while it remains available!