Why is the Slater & Gordon Limited share price going ballistic?

Shares of embattled law firm, Slater & Gordon Limited (ASX: SGH), have continued their recent upward climb today, gaining another 8.5% to 51 cents.

The shares have now gained 27% over the past week and more than 160% from their 52-week low of 19.5 cents per share.

Although this sounds impressive, investors might want to put this in perspective and note the shares have still lost around 85% of their value over the last 12 months and nearly 94% from their all-time high of $8.07.

Source: Google Finance

Source: Google Finance


From the point of view as a previous shareholder, I think this recent upward move is quite curious as the company has not provided any new market-moving news since the 2nd of May when it announced it had successfully agreed to new terms with its bankers.

Nevertheless, the increased trading volumes over the last week suggest there are some investors in the market willing to back the company for a major turnaround. More than 10 million shares changed hands yesterday and more than 6.5 million shares have been traded in the first hour today.

This step-change in volumes suggests professional money managers are now getting involved, perhaps on the basis that no news from the company is good news. Slater & Gordon will have a pretty good idea of its FY16 numbers by now, and under the ASX disclosure rules, would have to report any major discrepancies to the market as soon as it becomes apparent. On a side note, the company is due to report its full-year earnings on the 30th of August.

The recent sharp rise in the share price could also be the result of a short squeeze with the latest figures suggesting around 6.8% of the shares on issue are held by short sellers.

Whatever the reason for the recent upward spike in the share price, I would be cautious buying the shares at the moment. The saga surrounding Slater & Gordon is well known, and in my mind, I have yet to see anything that makes me think the company is positioned for a turnaround just yet.

Waiting for the full-year results seems like the most prudent option right now and investors who see a big improvement in the ability of the company to convert its work in progress (WIP) into cash and service its huge debt levels may consider this as a high-risk option.

In the meantime, investors interested in the legal space might want to consider shares like IPH Ltd (ASX: IPH) and Xenith IP Group Ltd (ASX: XIP) which appear to offer superior business models compared to that of Slater & Gordon.

If you are not at all interested in the legal sector, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a fat fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool contributor Christopher Georges owns shares of IPH Ltd. 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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