Tuesday, January 19, 2010

Opportunity in For-Profit Education Stocks?

I've been scouring the market universe looking for undervalued stocks.  Unloved sectors, turnaround situations, companies re-capitalizing, re-negotiating with lenders.  One of the key factors when looking for value is find stocks that have been discarded by the market, and polish them off and see if any value is there.  Benjamin Graham often referred to these as "Cigar Butts." 

I find the for-profit education industry a bit intriguing here.  This industry was hot the past few years.  You had the perfect storm of adults looking to further their skills to stay competitive, and the convenience of night, weekend, or online classes.  Then the recession hit and many people became unemployed.  Boom!  They're going back to school.  Subsequently, these stocks got bought up.  Apollo (the University of Phoenix) was a big name, along with COCO, ESI, DV, STRA, CPLA. 

Last fall, some studies were released that showed default rates on loans being higher in for-profit universities than state or community colleges.  These stocks have since been tossed aside.  Actually, STRA and CPLA are still up near highs, but the others have sold off.  Do I think the defaults on loans are an issue? Yes.  Do I think they will be enough to derail this industry?  Probably not.  So you still have all the previous positive factors in place, and earnings growth is still expected.  But the risk of loan defaults has pushed these stocks to fairly cheap levels, and they are sitting with big short positions.  So, a solid earnings announcement with an outlook that still shows good enrollment rates and no red flags about loan defaults could cause a nice rise in these stocks.  The short squeeze would only be pouring fuel onto the fire. 

The bottom line here, as it is with many value plays, is the risk/reward appears tilted in our favor for a little while.  I wouldn't own some of these stocks if they become expensive, but at these levels, they may be worth a look. 

I'm going to do some more digging, and will post anything relevant, as well as any related purchases.

Disclosure: None

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