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Investing $10,000 into Slater & Gordon Limited shares might be a bad idea

For years, Slater & Gordon Limited (ASX: SGH) was considered one of the local share market’s darling companies.

After becoming the first law firm in the world to list on a country’s stock exchange in 2007, Slater & Gordon went from strength to strength in its quest to dominate the personal injury space. High barriers to entry into the market together with limited competition played in its favour, and the shares soon went on a dazzling run, making shareholders some beautiful gains in the process.

A big part of the company’s growth strategy was to consolidate (acquire) other businesses. This was very well received by the market between 2012 and early 2015, over which time the share price soared more than 500%, from bottom to top. It hit a high of $8.07 in April this year.

Investors who bought Slater & Gordon shares five years ago and then sold out at the peak would have made a very handsome return. In fact, had you sold out at the very top in April 2015, your initial investment would have been worth $50,270 (based on my own calculations).

The trouble is, most investors could not have foreseen what would soon become of the company. Its share price is now languishing around a historical low of just $1.04.

For those who unfortunately held on, here’s what a $10,000 investment in Slater & Gordon’s shares five years ago would look like today (dividends included, and all calculations are my own):

Source: Company reports, S&P Dow Jones Indices

Source: Company reports, S&P Dow Jones Indices

In the end, it seems you’d have been better putting your money into an index fund that tracked the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). Your $10,000 would be worth roughly $13,438 today as opposed to just $8,150. Although you would need to adjust a little for dividends.

Indeed, Slater & Gordon’s share price has come under incredible pressure for numerous reasons. First, there was its controversial acquisition of Quindell Plc’s Professional Services Division in the United Kingdom, and the subsequent investigations into its accounting methods by the Australian Securities and Investments Commission and the UK’s Financial Conduct Authority.

The most recent pressure came from reports of proposed changes to personal injury laws in the United Kingdom. While Slater & Gordon’s management team has made it clear it does not expect its earnings in financial year 2016 to be impacted, it is unclear how their results could be impacted in FY17 and beyond.

Given that uncertainty, an investment in Slater & Gordon’s shares even today seems like a risky play.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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