Wednesday, November 5, 2014

Strayer Emerges From The Dust

When an entire industry takes it on the chin, the babies often get thrown out with the bathwater. As such, it can pay dividends to find the strong, quality companies that are likely to emerge from the rubble. I can't think of a better example to illustrate this than Strayer University.

Just over a year ago, Strayer was discussed on this site as a potential value opportunity. Since then, the shares are up over 65%, and have doubled over the last nine months. The amazing thing is that the company didn't do anything extraordinary to earn this return. It cut some costs as revenues fell (mainly by stopping/transitioning services at its most marginal locations), and stopped expanding due to revenue uncertainty, and that's about it!

All that happened to the stock price was that the pessimism that overshadowed the entire for-profit education industry lifted. Some companies within the industry bit the dust while others may still do so. But Strayer was a diamond in the rough. The balance sheet was strong, allowing it to outlast a downturn, and the company was ethically run: it was known from the beginning of the industry's troubles that Strayer was one of the good guys and would not have to make many (if any) changes to comply with new regulations. Finally, the company's price to free cash flow was in the mid-single digits!

Fast-forward a few months, and the result has been that this best-of-breed company now operates in an industry with higher barriers to entry, thanks to new regulations that are on the way. But alas, the company's price to earnings power is no longer as compelling as it once was. I still don't think the company is particularly expensive, however, so I could see why someone would continue to hang onto the shares. However, I have now sold my shares to look for more pessimistic pastures.

Disclosure: No position


Baruch said...

STRA was a classical value idea!

Anonymous said...

Well done, Saj.