Wednesday, March 27, 2013


As for-profit education stocks have continued to fall in the face of market strength, I have become more and more interested in this sector. But every company I've come across in this space seems to have a at least one risk I'm not comfortable with. For example, Career Education Corp is dirt cheap, but could face huge liabilities from a previous life. Corinthian Colleges is also dirt cheap, but may have to seriously dilute its shareholders if a regulatory decision doesn't go its way.

As a result, I've decided to take a basket approach to this industry. Instead of picking one or two favourites, I've taken small positions in a few companies. If the industry is cheap (which I think it is), then the portfolio will probably do well even if a few falter. I would use this same approach if I was interested in the pharma space (because you don't know which company will come up with the successful drugs and which will fail) and financials (when discounts to book values are large across the industry, I couldn't tell you which banks are likely to fail and which aren't), for example.

Because many of the players in this industry have a lot of cash without a lot of debt, have beaten down valuations, and have single-digit P/E ratios despite big drops in revenue (while the cost-cutting has only just begun), I want exposure to for-profit education. I figured this was the lowest-risk way to do it.

Note that this only diversifies away company-specific risks. Overall risks, such as very stringent gainful employment regulations, will negatively affect all companies in this space. That's a risk one just has to take if one wants to benefit from the potential upside in this space.

Disclosure: Author has a long position in a few for-profit education companies


Striver said...

I've thought exactly the same thing when looking at individual stocks in this sector. I first noticed them when looking through the lists at magicformula investing, lots of low PEs with high historical Returns on Equity but upon further analysis just too risky.

Seems like a sensible way to get access to the sector and spread risk though.

hcv said...

Are you concerned about online education disrupting this industry?

Anonymous said...

I think this sector is a trap.

Yes, the numbers look cheap, at first glance...

HOWEVER, a lot of these companies have leases that are going to eat them up. They are closing locations, but are still on the hook for the lease.

They also face lawsuits from their students.

They also face potential lawsuits from the government.

They also face TREMENDOUS negative publicity. Certainly, that is eventually going to have a negative factor on student recruitment/retention.

They also face acceditation issues.

They also face problems with student loan issues. They have HUGE default rates. I am going to guess that students loans make up well over 90% of their revenue...

Their business model does not make any sense. They get money from the government to hand out worthless degrees.

University of Phoenix just released statistics about graduation rates. It turns out that 1% of full time students seeking a bachelor's degree graduate within 4 year. 7% graduate within 6 years, and 13% graduate within 8 years...

I find it hard to believe those figures are true...

I guess time will tell...

Saj Karsan said...

Hi hcv,

I am! But some of these guys are disruptors in that field. I can't tell who's going to be successful though, so diversification makes sense for that reason too.

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