If there was ever proof that the short selling on Slater & Gordon Limited (ASX: SGH) was out of control, it's this:
Shares fell as low as $0.89 cents – more than a 50% loss – in trade today, on the back of a market-sensitive announcement regarding proposed changes to personal injury law in the UK that will likely have no impact on Slater & Gordon in Financial Year 2016 if implemented.
Now, there are a few things to take away from this:
- Slater & Gordon doesn't have a good track record with its market/ non-market sensitive announcements, as the recent Annual General Meeting update showed
- Short sellers will jump on any old news that appears negative, and with as many as 16% of all SGH shares on issue held for short-selling, it doesn't take much to initiate a landslide
- Although the proposed changes may not impact the current year's earnings, they could have an impact from Financial Year 2017 (FY17) onwards, given that the legislative changes will reduce the ability of claimants to sue for pain and loss in soft tissue injury claims
Firstly, credit goes to management for having the courage to designate today's announcement as market-sensitive because of the possible impact from FY17 onwards, even though it is unlikely to impact current year results.
This morning's fall looks to be a mix of investors factoring reduced case volumes into the company's future (from the legislative changes), combined with nervousness over the scope of the impact, compounded by predatory short selling.
For reference, 80% of Slater & Gordon's revenue in 2015 came from Personal Injury Law, which is the type of case most likely to be affected by the changes to UK legislation. Of 2015's total revenue, approximately 50% came from the UK through conventional operations and the newly added Slater & Gordon Solutions (recently purchased and rebranded; formerly the Professional Services Division of Quindell Plc).
It is uncertain how much of this was derived from cases of the soft tissue injury type (which may be affected by the new legislation).
However, given the scope of the proposed changes to legislation (which are not set in stone), today's fall looks to be blown massively out of proportion to the update, which doesn't look particularly market sensitive.
At current prices, Slater & Gordon shares definitely appear cheap enough to warrant a closer look, BUT, given the high levels of short-selling, uncertainty over the company's second half forecasts, and the absence of a visible catalyst to turn company sentiment around, I am not comfortable enough to consider owning shares.
As an aside, much of the volatility associated with Slater & Gordon's share price appears to be due to uncertainty, and management efforts to improve transparency and certainty for shareholders are likely to lead to improved stability in the share price as well as reduced short-selling.
