A few years ago the for-profit school stocks were one of the hottest sectors in the bull market. Absolutely destroying the shorts, companies like DeVry Inc. (DV), Apollo Group (APOL), and Corinthian (COCO) screamed higher in the bullish days, and for the most part recovered smartly after the bubble burst in 2008. The theory was these schools where a good place for the under and unemployed could improve their desirability to employers without having to put their lives aside to attend more traditional schools. DeVry and particularly the best of breed Apollo looked as though they could make a run at previous highs, given enough time.
Then came a very dark day last October when Apollo issued some of the worst earnings guidance since the fall of Al Dunlop at the old Sunbeam. Apollo announced dropping enrollment rates and pulled guidance for all of 2011 due to growth uncertainty and governmental investigations into their business model. This caused Apollo's stock to gap hugely lower and take out the rest of the sector with it. While Apollo has come close to recovering at least those loses, most of the sector hasn't been so lucky.
The news hasn't improved much. As recently as May of this year the U.S. Education Department released research announcing the average tuition in the for-profit space exceeded $30,000 a year in 2007-08 versus, $15,000 and $27,000 at state schools and private colleges, respectively. Considering the fact that for-profit college students get as much as 90% of their tuition from student aid and default on this debt at a rate greater than 15%.
Lisa Rapuano, Portfolio Manager at Lane Five Capital Management calls "Balderdash" on all of the above. Actually she says many of the "suppositions are wrong" and thinks the for-profit school stocks are handicapped by the snobbery of people like us. While I stand behind the research, it's hard to argue the snob point. As for the stocks themselves, they've been tortured for all of the above reasons, leading a contrary thinker like Rapuano to start shopping.
Starting at the upper-end of the spectrum, Rapuano says Apollo (APOL), the former poster-boys of the sector sell-off has weathered the storm(s) outlined above. The genesis of the concerns was the Gainful Employment act which threatened to gut Federal Aid to the schools. A modified, less onerous version of the bill was subsequently passed, alleviating concerns that the bill would be the death knell for the schools. Serving the higher-end customers and having the best reputation in the industry, Apollo has led the way back and in Rapuano's estimation has only just begun to claw its way back to the top.
Which brings us to the most controversial of the picks, Corinthian (COCO). Serving the low-end of the market Corinthian customers are the highest risk students in every sense: highest drop-out rates, highest default rates on loans and most difficult segment to achieve growth.
To Rapuano these are selling points. First of all, and it's impossible to separate this from her investment thesis, as she's passionate about the need for America to educate our lower class. Corinthian is focused on vocational training, meaning the "bang for the buck" for students who get their degree is highest. In terms of upward mobility, degrees from Corinthian or other vocational schools can mean the difference between being a laborer and a foreman, an enormous up in lifestyle.
Rapuano says you need to believe three things for an investment in Corinthian or any other for-profit educational stock to make sense: 1) You need to believe the school provides a decent education (read: return on investment for students). 2) You need to believe the demand is there. After a lurch in growth last year demand seems to be increasing across the board. High unemployment doesn't hurt. 3) You need to believe the company you invest in is complying with regulations. Now that regulations are actually established this is much less of a challenge for the schools.
A chance to do well by doing good. Investors typically would rather make money amorally and donate profits as they see fit, but hey getting long educational stocks may not be a bad idea either.
- bull market
- return on investment
- DeVry Inc.
- for-profit school
- Apollo Group
- vocational schools