On Wednesday I wrote an article about several heavily shorted stocks and sectors, and how predatory short-selling can crush share prices after the slightest hint of bad news.
That looks to be exactly what happened to shares in Slater & Gordon Limited (ASX: SGH) yesterday – but I'll get to that in a moment.
Also on Wednesday, Fool writer Tom Richardson published an article after Slater & Gordon released a statement criticising an article in the Australian Financial Review that implied the company was being investigated.
It appears as though several hedge funds with a short interest in the stock may have sneakily used rumours and subterfuge in an attempt to promote their own financial agenda. Slater & Gordon shares fell 5% on Wednesday.
But the story doesn't end there!
Oh no. Yesterday, the UK's financial watchdog, the Financial Conduct Authority (FCA), announced it was probing the activities of Quindell Plc, specifically with regards to its accounting policies in 2013 and 2014.
Slater & Gordon recently purchased part of the Quindell business for $1.2 billion dollars, and the investigation fuelled shareholder worries that the Quindell acquisition was a gigantic mistake. Shares in SGH dropped 12% by lunchtime, before the company released a second statement announcing that it performed very thorough due diligence into over 8,000 past cases and Quindell's accounts prior to the acquisition and because of this:
"Slater and Gordon is confident that it has no liability in relation to the ongoing investigation relating to Quindell."
So how does all this relate to short-selling?
Well, readers might be interested to learn that a staggering 8% of Slater & Gordon's total share float was reportedly held for short selling in the lead-up to this week's wipeout. That was a drastic increase from the amount held in February and likely reflects a combination of scepticism and opportunism from significant investors.
However as long-term investors, readers should look to be 'greedy when others are fearful' and ask if the company is a buying opportunity at today's prices. Given that Slater & Gordon is not under investigation, and that it has no liability with relation to the Quindell matter, it looks as though it could all be a storm in a teacup.
It's too early to tell if the Quindell acquisition was a good idea or a bad one, but Slater & Gordon shares are now changing hands for just 3% more than they did a year ago – some 30% lower than recent highs of $7.50 – and today could be an opportune time to take a stake. However, If you're not comfortable with the many unknowns of a Slater & Gordon acquisition, just read on to discover another reliable stock for new money today.
