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Is the Slater & Gordon Limited share price poised to crash again?

Credit: Patrick McKnight

The recent heavy falls at Slater & Gordon Limited (ASX: SGH), which wiped off more than 50% of the company’s value in a single day last week, have got a number of shareholders talking about value and whether the stock is a buy right now.

In addition to the big questions at the forefront of many investors’ minds regarding future revenues and the company’s full year forecasts, I believe there is another serious risk that could send the share price crashing further.

I’m talking about the S&P/ASX 200 (INDEXASX: XJO) and its quarterly rebalancing. Last year, shares in Reject Shop Ltd (ASX: TRS) fell from $16 to below $10 after some negative updates, resulting in the stock being cast out of the ASX200.

Major shareholders subsequently sold down, and the stock hit prices of $5.40 a few weeks later.

(source: Google Finance and ASX)

(source: Google Finance and ASX)

With a market cap of just $242 million, Slater & Gordon is now far too small to remain in the ASX200, and with the upcoming index rebalance in December, I believe the stock will drop down into the ASX300.

(source: Google Finance)

(source: Google Finance)

This may lead to heavy selling as index funds are forced to sell their holdings and replace it with up-and-comers like Speedcast International Ltd (ASX: SDA).

The index rebalance is neither a reason to buy, nor sell Slater & Gordon per se, but it’s a useful reminder:

Just because prices are low, doesn’t mean a company is cheap – or that it won’t fall further.

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Motley Fool contributor Sean O'Neill owns shares of The Reject Shop Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position 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.

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