Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investment Opportunity Due to a S&P Lawsuit?

Companies / Investing 2013 Feb 12, 2013 - 10:36 AM GMT

By: InvestmentContrarian

Companies

Sasha Cekerevac writes: Sometimes the best investment opportunity arises when a situation looks the bleakest. When a firm’s earnings outlook is stable and there is little volatility in the stock, this makes it extremely difficult to identify an investment opportunity, since all the good news is usually priced into the stock.

An interesting situation is taking place now, and I’m surprised it hasn’t happened sooner. The United States Department of Justice (DOJ) is taking the Standard & Poor’s (S&P) unit of The McGraw-Hill Companies, Inc. (NYSE/MHP) to court, alleging that the ratings agency was involved in fraudulent activities.


From 2004 through 2007, according to the complaint, S&P allegedly issued credit ratings on approximately $1.2 trillion worth of collateralized debt obligations and $2.8 trillion of mortgage-backed securities. The government is seeking $5.0 billion from the firm for damages incurred, as they believe the ratings were fraudulently issued. (Source: Pettersson, E., “McGraw-Hill, S&P Sued by U.S. Over Mortgage-Bond Ratings,” Bloomberg, February 5, 2013.)

Initially, the government was seeking a fine of $1.0 billion in addition to an admission of guilt from the S&P unit. Failing to reach an agreement, the government is now escalating the case, along with the fine.

To begin with, I do not like the way rating agencies operate. For those who aren’t aware, a ratings agency is actually paid by the issuer to rate it before being sold to investors. This creates an obvious conflict of interest. For a rating agency that is interested in increasing its earnings outlook and creating a greater investment opportunity for the future, its best interest, in my opinion, is to issue favorable ratings that will entice more companies to use their services.

However, I am not here to make a moral judgment, but to understand if the stock offers a reasonable investment opportunity. The truth is that S&P is only one unit within the group of many McGraw-Hill companies. Other units include J.D. Power & Associates, as well as the McGraw-Hill Education unit. (Source: McGraw-Hill Companies, Inc. web site, last accessed February 7, 2013.)

Standard &Poor’s recently released a statement refuting the DOJ allegations, stating, “Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. We will vigorously defend S&P against these unwarranted claims… Unfortunately, S&P, like everyone else, did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected.” (Source: “Standard & Poor’s Says DOJ Civil Lawsuit Is Unjustified And Without Legal Merit,” Standard & Poor’s web site, February 5, 2013.)

One well-known analyst, Meredith Whitney, who has been very critical of the banks in the past stated on Bloomberg, “The case of the government is that S&P actively defrauded investors. I find that very hard to believe and I think that’s going to be very hard to prove.” (Source: Dexheimer, E., “S&P Fraud Will Be Tough for Government to Prove, Whitney Says,” Bloomberg, February 7, 2013.)

Without this lawsuit, the earnings outlook for the company was quite stable. This is a stock that pays out a dividend yield of 2.5% and is expected to have a mild increase in its earnings outlook over the next several years. The company also has over $1.2 billion in cash. (Source: Yahoo! Finance, last accessed February 7, 2013.)

While the government’s initial claim of $1.0 billion in fines is quite large, it would not cripple the company; it would simply erase one year’s worth of income. For the long-term investor, this might create an interesting investment opportunity, as long as guilt was not admitted.

A $5.0-billion fine, however, is very severe. Even with a stable earnings outlook for the remaining businesses, this would not be a good investment opportunity, as it might force the company to completely restructure or even shut down completely.


Chart courtesy of www.StockCharts.com

This is a 10-year weekly stock chart for McGraw-Hill Companies. Note the massive selling pressure currently taking place. Normally, I don’t advise trying to pick a bottom, as a fall in price can continue for a very long time.

An interesting investment opportunity might occur around the $40.00 level. On the chart above I’ve circled several instances over the past decade in which the $40.00 level played an important role as either a pivot or resistance point.

There are four scenarios to consider:

1) If the company were to be completely exonerated through the courts, this should be massively bullish; since there would be no fines, a stable earnings outlook makes this is an obvious investment opportunity.

2) If the company were to settle at or below $1.0 billion, as per previous negotiations, and not admit guilt, this too would offer a long-term investment opportunity, as the future earnings outlook would not be impacted by the massive repayment of fines and future litigation.

3) If the company were to settle and admit guilt, this would lower the investment opportunity; an admission of guilt would open the door to potentially increased levels of civil litigation, lowering the company’s future earnings outlook.

4) If the company were to lose in court, this would be an admission of guilt in addition to a $5.0 billion fine. In no way would this be an investment opportunity, as the entire business and the company’s survival could be in jeopardy.

I am not a lawyer in any way, and this is purely my opinion. I believe option one has a very low probability (less than five percent) of occurring. I also don’t believe that option four will occur, as proving fraud in court is extremely difficult.

I personally believe the company and the DOJ will settle, without admitting guilt, at the previously estimated levels of approximately $1.0 billion. If that were to occur, 10 years from now, we will look back and view this pullback as an investment opportunity, since the earnings outlook will continue to be strong for many of the firm’s divisions.

Having said that, I would not buy the stock at this point; I’d simply wait to see how developments occur and at what price the stock stabilizes. It could drop to $20.00 before stabilizing, so buying now is dangerous.

Once we get some more information over the next few months, I can better assess the risks and rewards when calculating if this is a good investment opportunity and how the earnings outlook will be affected.

Source:http://www.investmentcontrarians.com/stock-market/investment-opportunity-due-to-a-lawsuit/1415/

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

About Author: Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. See Sasha Cekerevac Article Archives

Copyright © 2013 Investment Contrarians - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Investment Contrarians Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in