The Volkswagen (VW) scandal might feel miles away from the ASX but there is at least one local stock that is likely to be impacted.
I am referring to law firm Slater & Gordon Limited (ASX: SGH) on the prospect of multiple class actions against the German automaker.
Slater & Gordon said its London business has received 500 calls so far from people who believe they have been misled by VW, according to the BBC.
There are around 11 million vehicles around the world that are affected by VW's "cheating software" that makes its diesel engines appear greener than they really are, and two million of these vehicles are in the UK while more than 50,000 of them are likely to be in Australia.
There's still a lot more water to run under this bridge before we can get a better sense of whether any lawsuits will be lodged in the UK or Australia, and whether Slater & Gordon will benefit from this.
While fellow law firm Shine Corporate Ltd (ASX:SHJ) could also benefit from any VW lawsuits, Slater & Gordon is best placed to capitalise on this opportunity due to its geographic reach and market leadership.
However, Slater & Gordon can do with any little piece of good news as it tries to shake-off its own problems surrounding its accounting practices, and its acquisition of UK firm Quindell's PSD.
Slater & Gordon went some way to address its accounting problems in recent days by making a number of adjustments to its accounts but looking at its share price, which is still trading under $3 when it was trading close to $8 in April, the news has not won over many sceptics.
The investigation by the Australian Securities & Investments Commission (ASIC) into the group's accounts is still ongoing, although the market is not expecting an adverse outcome given the changes the group has already made.
I think the stock is cheap under $3 but there are two key issues that will keep the stock under pressure. The first is the group's poor cash conversion with Slater & Gordon booking profits in excess of the cash they are collecting and you will probably have to wait to see its full year results next August to see any meaningful improvement on this front.
The other issue is the potential change in management. Short-sellers are probably targeting the stock on the belief (or hope) that the debacle will force some of its senior executives to resign.
Any change at the top typically puts the share price of a company under pressure and short-sellers betting on a fall in Slater & Gordon's share price will probably hold their bearish positions open until this issue is resolved.
On the upside, I think the stock has the potential to rally to over $5 once these issues are put to bed – but that could take 12 to 18 months to play out.
