This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

United States Vs. McGraw Hill: The Case For Efficient Markets

The stock market may not be perfectly efficient, but it is beautifully close. Monday, the S&P Ratings announced that they were anticipating being sued by the United States Department of Justice over their role in the financial crisis. S&P is part of the McGraw Hill conglomerate ( MHP). McGraw Hill's stock fell almost immediately about 13%. Yesterday, the Attorney General placed a number on the damages being sought, $5 Billion. Within hours, McGraw Hill had fallen another 5.7% on the news.  McGraw Hill's total loss of Market Cap reached $2.7429 Billion by 12:00 pm on February 5 th , 2013, or 54.85% of the amount of damages being pursued by the Us Attorney General.

One could say that the market participants have given the US a 54.8% chance of winning; Or to be more precise since the courts can award partial damages, the market believes that court costs and damages will add up to approximately $2.75B for McGraw Hill. By market close on Tuesday, MHP had lost over 22% of its value, losing $3.75 Billion in market cap, an astonishing 75% of the total damages sought by the DOJ.

The investment opportunity, for any who doubt the efficiency of the stock market, lies in speculating upon the outcome of the trial. A settlement for anything less than $3.75B should cause McGraw Hill's stock to appreciate, with a slight premium added in for the removal of uncertainty. A full victory for the Attorney General will cause McGraw Hill to fall by another $1.25 Billion.

A periphery investment opportunity arises from S&P's competitors, Moody's and Fitch. Moody's, a subsidiary of Moody Corp ( MCO), had shed $1.3 B in market cap within hours of Tuesday’s announcement. By the closing bell, MCO was down over 17% in the last two days, losing $2.16B in market cap.  Essentially, the market is giving Moody's a 43% percent chance of incurring the $5B liability mentioned by the Attorney General for S&P. This is essentially a 75% chance of S&P losing, and a 57% chance that if S&P loses, Moody's will also be brought to trial and lose. 

These percentages may understate the market odds being given to Moody’s. Moody’s had revenues of $2.28 Billion in the last year. This is slightly more than a third of the $6.2B in revenues brought in by the McGraw Hill Companies. $5B would be crippling for MHP, but it would be catastrophic for Moody’s. If the damages are proportionally adjusted by revenues, then the DOJ, if they sue MCO, should seek slightly more than $1.75B in revenues from Moody’s. Moody’s already lost more than that in market share. At times, investors are seized with fear and overreact. If this is the case, then the price of MCO will correct to reflect a more rational probability of incurring a liability, giving investors an opportunity to profit by buying MCO.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG

Markets

DOW 18,132.70 -81.72 -0.45%
S&P 500 2,104.50 -6.24 -0.30%
NASDAQ 4,963.5270 -24.3630 -0.49%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs