Ratings agencies - famously bad but horribly profitable
Good investors sometimes hold their nose and buy shares in imperfect businesses.
Hi folks,
I’m bringing an investment idea for you today that you’ve probably never considered.
But it’s a company that you have heard of. Unless you signed up to this newsletter by accident, I can guarantee that you’ve used one of its products, although you’ve probably not paid for it.
Its name is ubiquitous in the world of finance.
It enjoys a mouth-watering operating margin of over 50%, return on equity of 17%, and is targeting organic revenue growth of 6.5% to 8% over the medium-term.
This wonderfully profitable business is going from strength to strength, despite the fact that, since the 2008 financial crisis, it is widely viewed as being not very good at what it does. It has even been depicted as morally corrupt in a major Hollywood movie!
But thanks to the retreat in stock market valuations this year, I now believe that it’s worth a place on our watchlist.
I’m talking, of course, about S&P Global ($SPGI).
The company was depicted very badly in The Big Short (2015). In one of the crudest metaphors ever seen on screen, S&P is represented by a ratings analyst whose vision is impaired and who even utters the line “I can’t see a damn thing!”, right before she explains why AAA ratings were awarded to poor-quality mortgage bonds.
But if ratings agencies performed so badly in 2008, failing to provide any warning to investors that Armageddon was coming, then why are they still in business? Why weren’t they replaced by a better way of assessing risk?
Unlike Lehman Brothers, the ratings agencies are still here and are more powerful than ever.