Tuesday, July 10, 2007

Paperstand (MCO, EYE)

The WSJ’s ”Heard on the Street” column out saying that short sellers love to tgt co’s heading into financial turmoil. Now, some of those are targeting Moody’s (MCO). But unlike some of the blowups in the recent past that the credit-ratings firm and its main rivals caught too late, such as WorldCom and Enron, its profitability and cash flows remain strong. That makes it a tough stock to bet against. Still, Moody's and other credit-rating firms are again taking heat for the meltdown in the subprime-mortgage mkt. Bearish investors are betting that Moody's shares will tumble as the co's lucrative business in providing ratings for structured debt products, such as collateralized debt obligations (CDOs) could dry up due to fears spreading from rising defaults in those mortgages extended to borrowers with poor credit histories. Together with some analysts and academics who believe the rating agencies played a key role in the subprime crisis by giving high ratings to thousands of bonds that fell quickly in value, some short sellers also are wagering that legislators, regulators and disgruntled investors will shake up the existing oligopoly structure and put an end to its fat margins and profits. "It's a great business model as long as you can get ppl to pay for it," says James Chanos, of Kynikos Associates. Mr. Chanos, among the most vocal of Moody's critics, is known for having bet early against Enron. "If they have no predictive power over that which they're rating, then why bother?"

Barron’s Online “Inside Scoop” section reports that hedge fund ValueAct sees plenty of upside in Advanced Medical Optics (EYE). Over the past two weeks, ValueAct has bought nearly $50m in shares of AMO. The buying spree has boosted ValueAct's stake in Advanced Medical to 12.6%. According to StreetSight.net, ValueAct "looks for fundamentally undervalued co’s with strong business models and potential growth opportunities." Ben Silverman, of InsiderScore.com, notes that ValueAct began building its stake in the 1Q before the recall, buying 2.8m shares. The hedge fund then embarked on its latest buying binge after AMO announced the Complete MoisturePlus recall. "That suggests that ValueAct felt [Advanced Medical] was oversold at that point, and that it was a near-term issue that would have a negative impact on the co for the next couple of quarters, but that the co's prospects are still bright," says Silverman.

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