Ratings Agencies Aren’t Going Away Any Time Soon: Moody’s Corporation (MCO), The McGraw-Hill Companies, Inc. (MHP)

The current expectation is that the DoJ will not announce a suit against Moody’s Corporation (NYSE:MCO) or other ratings agencies until their case with S&P is settled.  That means that if the case against S&P goes badly for the DoJ, no legal action at all would be taken against Moody’s or others.

In addition to the risks from the DoJ and state attorneys general, hedge fund manager David Einhorn has announced that he is short both McGraw-Hill and Moody’s.  If he takes an opportunity to expand on his short thesis in a presentation or conference, that could also hurt shares as traders short the stock based on his more public short thesis.  As the article mentions, though, he has been short Moody’s since early last year, over which time the stock has rallied over 40%.

After seeing how many companies continue to put emphasis on the ratings agencies’ views, I don’t think that this suit will change anything for the agencies, their business models, or their profits.  There are simply no viable alternatives that make sense.  Also, large, well-respected companies would be slow to adopt any new ratings models because the potential damage from incorrectly abandoning the current ratings system is far greater than the potential benefits of being one of the first to adopt a new model.

There are a lot of headline risks in Moody’s and McGraw-Hill right now, but the stocks appear to be pricing in too much of an impact from them.  If the stocks get hit any further from these headlines, they become attractive long-term buys for investors who can handle the volatility.

The article Ratings Agencies Aren’t Going Away Any Time Soon originally appeared on Fool.com and is written by Adam Jones.

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