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For Profit Education: How Low Can You Go?

By: Martin Tillier
Posted: 8/29/2013 11:41:00 AM
Referenced Stocks: APEI;APOL;COCO;DV;STRA

As a sector, for profit education has been a dumpster fire since the beginning of 2012. The industry has had a reputation problem, to say the least. Poor student loan repayment rates have led to accusations of pushing people into unsuitable programs, just to pocket the loan money. The threat of government involvement has seen investors deserting the sector in droves. It would appear that everybody is fearful, so is now the time to follow the advice of Mr. Buffett and be greedy? (I refer of course to Warren, not Jimmy).

There may be some opportunity at these depressed levels, but investors should tread with care. As the cost of conventional college continues to rocket, these less expensive, online educators could well play an important role in educating the future workforce, but it is a competitive business and not all will benefit equally when the fear subsides.

Just how much damage has been done can be seen by the comparative chart above. Of five of the better known and larger companies in the field, DeVry (DV),Corinthian (COCO), Strayer (STRA), American Public Education (APEI) and Apollo (APOL), only one, COCO, is in positive territory since the beginning of 2012.

I believe the selling may be overdone and these companies will have a viable, maybe even important, role in the future. If you agree, then it may be worth looking for a reason to buy a couple of the stocks.

One standout, because of a different business model, is APEI. The company specializes in the education of military service people. They were in the news recently after their acquisition of Hondros College, an Ohio based nursing school with both a campus and online presence. The deal in itself may not contribute enormously to profit (It is expected to become accretive to earnings in FY 2014, and based on $24 Million of revenue last year, can be expected to add around 2% to earnings) but an increased focus on healthcare and STEM education may be a decent strategy.

The government, with a focus on those subjects and a need for military training, is less of a worry to APEI than many others. The stock, however, has been dragged down as the industry has taken a beating. A consistent record of profit growth and an earnings yield of 7.04% would indicate a healthy company that is currently out of favor more than anything else.

Probably the best known of the companies above is Apollo, due to their ownership of the well publicized University of Phoenix. As you can see, they have declined the most since the start of 2012, so, in theory, could have the most potential. I wouldn’t be a buyer yet, however. The company has had dealings with the SEC in the past. While these troubles have ended, I don’t think it is too cynical to believe that that, combined with their high profile may lead to their problems with the government being exaggerated.

As I said, apart from just being in an out of favor sector, I think it is advisable to have another logical reason to invest in any of these companies before wading in. DeVry (DV) has zero debt and a consequentially strong balance sheet, which will enable this experienced company to weather any problems that may occur. They too have a focus on healthcare and professional education, which may well help them.

Investing in a sector that is severely downtrodden can be rewarding when you get it right, but bear in mind that the stocks are under pressure for a reason. There are certainly troubled times ahead in the industry, but taking a chance on a couple of names for which it is possible to make a case could pay off. This is a high risk thing to do, so if you are not that way inclined, I would wait for some clarity.  If you don’t mind risking a small portion of your portfolio, then both APEI and DV may be worth buying at these levels.