Strategy Seeks a Stop to Slide in McGraw Hill Shares
Date: February 8th, 2013
Stock: McGraw-Hill Companies (MHP)
Trade Details: McGraw Hill (MHP) traded the August $45/$50/$55 Butterfly Call Spread on 2-5-13 at $0.90 debit (Currently Offered at $0.70) for 2,300X4,600X2,300, a $207,000 net debit with a profit zone between $45.90 and $54.10. The spread expects MHP shares to rebound from the recent sell-off and also for volatility to settle.
Fundamental Analysis: McGraw Hill is an $11.85B information services Co. trading 11.25X earnings, 1.87X Sales, and 20.95X FCF with a 2.39% yield. Shares fell 27% in the last week after news that the Government is suing rating agencies over mortgage-backed security ratings that contributed to the 2008 financial crisis, and McGraw Hill is the parent company of S&P. Prior to the news shares were nearing all-time highs, a Company seen to be a potential break-up candidate that could split apart its businesses to enhance shareholder value. David Einhorn has publically stated the worst is yet to come and is short MHP and Moody's (MCO). Raymond James upgraded to Strong Buy on 2-6-13 with a $62 target, while Benchmark and Jefferies also defended with Buy ratings.
Technical Analysis: MHP's chart has quickly turned ugly after making a double top and now snapped a 4 year uptrend, but nearing extreme oversold on the weekly and the 150 week MA at $39.10. Utilizing Fibonacci Retracements shares made lows this week at the 38.2% retracement of the 2009 lows to recent highs at $42, so that is support, and the 50% level is down at $36.90. A bounce to the next Fibonacci at $48.35 would likely serve as resistance, but if can find $42 support the strategy outlined above should be effective.
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