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.
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.
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.
