What happened
Moody's (MCO -1.58%) stock price took a hit in January, dropping 15.2%, according to data provided by S&P Global Market Intelligence.
The credit rating agency finished the month below the S&P 500, which was down 5.9% in January. Year to date, Moody's is down about 11% as of Feb. 3.
Image source: Getty Images.
So what
Moody's is primarily known as the largest credit rating agency in the U.S., along with S&P Global, but it also has an analytics business that accounts for about 37% of its revenue. It is one of three major credit rating agencies, so it enjoys a significant competitive advantage, which is why it's one of Warren Buffett's favorite stocks.
With its moat as one of just a few major players in the space, Moody's has been remarkably consistent and profitable over the years. Last year it returned about 35% and over the past 10 years it has an annualized return of nearly 25% through Feb. 2.
It doesn't appear there was any specific catalyst or news related to the company that caused the stock to plummet 15.2% in January. The company doesn't report fourth-quarter and year-end earnings until Feb. 10. (Corporate Event Data provided by Wall Street Horizon.) But it's likely that the year-end numbers will be strong, as President and CEO Rob Fauber said in the third-quarter report that he expects double-digit annual revenue growth in 2021.
Now what
It is likely that the decline is related to the overall sell-off that hit overheated growth stocks, as Moody's price-to-earnings ratio had climbed over 35 from the mid-20s in late 2020. The past couple of years have been extremely successful for Moody's, as the credit rating business generally thrives in times of low interest rates because more entities issue debt when it's so cheap to do so. Now the P/E ratio is back down to about 29, closer to its historical range.
The other factor that no doubt impacted Moody's stock price is the Jan. 26 meeting of the Federal Reserve Board, where it indicated that an interest rate increase was likely in March and there could be multiple hikes this year. That could slow down debt issuance, which would impact Moody's revenue.
But Moody's also has a growing analytics business, which tends to perform well in down markets.
Investors may not see the type of returns this year that Moody's has generated for the past couple of years, but this remains a great company with advantages that make it a foundational piece in a portfolio.
