Short City: McGraw-Hill

Posted Dec 8th 2010 1:30PM by Joseph Lazzaro
Filed under: McGraw-Hill Companies (MHP), Stocks to Sell

Diversified publisher McGraw-Hill Companies Inc. (MHP) is likely to face a challenging 2011.

McGraw-Hill's education segment will face an increasing sluggish textbook market, as public school systems -- particularly those in poorer U.S. school districts, K-12 -- continue to belt-tighten in every way possible, due to state and local budget cutbacks. Translation: use existing textbooks longer, and increase use of the used-book market.

Meanwhile, MHP's financial services unit will eek-out a minor revenue gain in 2011, but it won't be enough to offset a continued revenue decline in its information/media unit.

The Thomson/Reuters First Call FY2010/FY2011 EPS estimates for MHP are $2.67 to $2.88. Each EPS estimate looks about 10% high, according to my analysis.

Technically, McGraw-Hill stock vaulted to about $40 from $27 this fall, but did not take out $40 resistance. One could argue that the recent pull-back to $34 was merely a correction, but the calculation here is that MHP is headed to about $20.

Stock Analysis: I'd consider selling McGraw-Hill at this level, $36 to $38, if you can tolerate high risk. I'd cover the short on a bounce off $30, $28, $26.80, or $20. I'd put a buy/stop loss at $42.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: McGraw-Hill, MHP, Stocks to Sell