Investors should buy stock in McGraw- Hill Cos., owner of Standard & Poor’s, as the risk posed by the U.S. lawsuit against the credit-rating company is manageable, according to Peter Appert, an analyst at Piper Jaffray & Co.
The U.S. Justice Department filed a complaint yesterday in in Los Angeles, accusing McGraw-Hill and S&P of three types of fraud, the first federal case against a ratings company for grades related to the credit crisis. McGraw-Hill fell 13.8 percent yesterday after saying it expected the suit and dropped 8 percent to $46.51 at 9:59 a.m. in New York.
“Litigation risk has proven manageable,” Appert said today in a report. “After four years of extensive discovery, the long sought ’smoking gun’ that would prove fraud has failed to materialize.”
McGraw-Hill (MHP:US) may rise to $85 within two years and is unlikely to fall below $43 due to its climbing profits, Appert said. He also recommended that investors buy stock in Moody’s Corp. (MCO:US), which dropped 11 percent yesterday to $49.45. Moody’s, which was not sued, may climb to $86 in two years, he said.
The two companies’ stocks may be “dead money” over the next three to six months as investors adjust their expectations of litigation risk, Appert said.
“A DOJ lawsuit would be entirely without factual or legal merit,” S&P said in a statement yesterday before the case was filed. “It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market, including U.S. government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained.”
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