The share price of Slater & Gordon Limited has doubled in value since last Friday as the wild price swings reflect analyst and investor confusion over the law firm’s outlook.

Analysts were quick to swing the axe on price targets for the firm last Thursday after the company announced that proposed amendments to UK legislation around damages for personal injury claims may impact its outlook.

It’s no big surprise that the analysts were quick to slash their price targets as on first blush the proposed changes would appear to have a serious impact on the firm’s newly acquired Slater & Gordon solutions business.

In effect they would mean road traffic accident victims with a cause of action for a quantum less than GBP5,000 would have to go direct to the defendant’s insurer and cut out de facto legal services on the terms they are able to be provided today – these terms may encourage claimants to pursue claims on spurious grounds due to the service fee structures.

Notably, the changes could mean lay people likely having to familiarise themselves with the torts of negligence and principles of reasonable foreseeability, alongside the finer points of the civil procedure rules, which means they will be universally opposed by the legal profession in the UK.

However, it seems likely that some kind of reform will be introduced in this area including the banning of general damages for soft tissue injuries, which is generally the lowest form of compensation awardable and very low margin work even for an efficient claims management company. Moreover, the proposed changes would not stop some of the claims management services that are provided by Slater & Gordon solutions, indeed they may even increase demand for them if lawyers are cut out the process.

The lifting of the small claims limit (if enforced at the proposed level) would have significant ramifications, although it is not possible to eliminate the tort of negligence and as Slater & Gordon management stated: “The proposals do not eliminate the right to claim compensation, or the opportunity for people injured in road traffic accidents to obtain advice and assistance with road traffic accidents”.

There’s no escaping the fact these proposed changes are bad news for Slater & Gordon, with the removal of the general damages limit seemingly impossible to adapt to; however, I expect Slater & Gordon management will work to adopt its claims management business to avoid the worst of the consequences to the increase in the small claims limit. Clearly these changes are significant, but the large cuts to some analysts’ price targets may prove a wild overreaction in time.

The post Is The Slater & Gordon Limited Recovery A Dead-Cat Bounce? appeared first on The Twelfth Magpie.

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The original writer of this article, Motley Fool contributor Tom Richardson, owns shares of Slater & Gordon Limited. You can find Tom on Twitter @tommyr345

Neither The Motley Fool UK nor 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.

No words can describe the anguish felt by shareholders of Slater & Gordon Limited (ASX: SGH) who watched helplessly as their shares more than halved in price last Thursday.

The shares plunged to a low of 89.5 cents just after midday before ending the session at 94 cents, down an incredible 51.4% for the day. They’ve lost more than 69% over the last week and 88% since early April and are now trading below their 2007 initial public offering (IPO) price of $1 for the first time.

To put that in perspective, the market is now valuing the company at just $330 million, down from roughly $1.1 billion last week.

Here are five things you need to know:

1. Existing concerns

Slater & Gordon’s share price had fallen dramatically before yesterday. This was the result of two separate investigations into its accounting activities; its controversial acquisition of Quindell earlier this year (setting it back roughly $1.2 billion); and concerns about its book-keeping processes.

2. Heavily Shorted

Slater & Gordon has become one of the most heavily shorted companies on the ASX (meaning investors are betting on the share price falling further). According to ASIC, 16.3% of its shares were shorted on 20 November, 2015, meaning any bad news is likely to have a dramatic impact on the share price.

3. Proposed changes to personal injury law

With that in mind, yesterday’s heavy decline came after the company released a market sensitive announcement. The company spoke briefly about proposed changes to personal injury law in the UK which, if implemented, would impact on the rights of people injured in road traffic accidents.

By increasing the “Small Claims Track” minimum from £1,000 to £5,000, the proposed changes could stop small claimants from using lawyers on a ‘no win / no fee’ basis. Instead claimants would have to apply directly to a defendant’s insurer.

Analysts are already sceptical whether the company can achieve its lofty earnings guidance, so yesterday’s news couldn’t have come at a worse time.

4. Quindell 

As if the Quindell acquisition hadn’t caused enough angst amongst shareholders, the vast majority of earnings from the division (now known as Slater & Gordon Solutions, or SGS) come from road traffic accidents.

5. Effect on earnings

Slater & Gordon said it doesn’t expect there to be any impact on its performance this financial year (FY16), while it reiterated its guidance for $205 million EBITDAW (earnings before interest, tax, depreciation and amortisation, less the movement in work in progress). However, if the proposed changes are implemented, it could well have an impact on earnings in FY17 and beyond.

As highlighted by The Australian Financial Review, UBS expects a 33% decline in revenue in FY17 while EBITDA could fall by 43%. The AFR said UBS has also set a 90 cents price target on the shares.

Should you buy?

Slater & Gordon’s share price collapse has no doubt intrigued some investors keen to pick up a bargain. Although the shares might look cheap, there is still a multitude of uncertainty surrounding the company and its circumstances which could force the shares even lower from here.

In other words, an investment today would seem more like speculation which is a dangerous game to play.

The post 5 Things To Know About The Slater & Gordon Limited Share Price Collapse appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

The original author of this article, Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest. 

Neither The Motley Fool Australia nor The Motley Fool UK has a 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.