My Special Situations portfolio had a nice run with McGraw-Hill (NYSE:SPGI), which recently sold off its education segment. My original purchase was predicated on a spin-off or sale of that division, leaving a highly cash generative business behind. We saw that come to fruition, and a sale of the shares just a few days ago would have seen the position up nearly 20% in about nine months.
But what a difference a day makes!
Since then, the U.S. Department of Justice has announced that it is filing a civil suit against the company's Standard & Poor's unit. As The Wall Street Journal explained: "The Justice Department alleges that S&P knew the housing market was collapsing but was intentionally slow to downgrade hundreds of securities because of concerns that such a move would cut off the pipeline of deals and anger issuer clients." The government has said that it could seek more than $5 billion as part of the suit. For reference, McGraw's market cap is about $14 billion.
It surprises no one that the stock plummeted on the news. And it won't be surprising if further negative details emerge as the government bangs the drum. That presents a lot of headline risk for the company, something I had suspected was largely past, given the five years since the housing market exploded with not much in the way of penalties against the ratings agencies. Investors in Moody's (NYSE:MCO) have also seen shares tank, for similar reasons, expecting that agency to be next in the firing line.
Of course, the ratings agencies aren't the only players responsible for deep-sixing the global economy, but the big banks are too politically well-connected to receive the scrutiny and action that they deserve, and S&P's fatuous downgrade of U.S. debt in 2011 did it no favors.
So I'm selling my McGraw-Hill shares with a modest loss (as of this writing). I bought at $48.77, and with the stock now around $45, my Special Situations portfolio will notch a loss of about 8% if we could sell today. Tomorrow, I'll liquidate the position and return to looking for other special situations.
Jim Royal has no position in any stocks mentioned. The Motley Fool recommends Moody's. The Motley Fool owns shares of McGraw-Hill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.