Education Sector Still Looks Dangerous

Consistent readers should be aware of the fact that I see many for-profit education companies as short candidates. Conventional wisdom states that during tough economic times, workers will pursue education programs in order to improve their wage potential, or to develop skill in an area likely to provide them a job.

From a personal standpoint, this is an excellent approach. Early in my career, I put in the time and effort to get through an MBA program while at the same time earning the CFA designation. The hours were long, the coursework was rigorous, and the mental strain was at times a bit overwhelming. But completing these programs opened doors for me that would otherwise have been unattainable. Furthering one's education is certainly a good thing.

But from an investment standpoint, many of these education companies bear too much risk at current prices. Last month I recommended investors avoid or short Capella Education (CPLA). These concerns are still in place, and I continue to watch for the stock to fall. Today I want to introduce readers to DeVry Inc. (DV) and recommend investors avoid this name as well. The stock currently trades at a published PE of 31 and the chart shows that the stock has significant overhead resistance.

Last week, many of the education companies rallied (DeVry included) when Apollo Group (APOL) reported a strong quarter. The company has been sinking investments into systems to help increase enrollment and it appears those investments are paying off. Stocks in the sector ramped sharply as investors believed Apollo’s success would translate to the entire group. However, Capella Education and DeVry did not come close to making new 52-week highs. In fact, both stocks simply made up some of the previous months' losses.

Devry boasts of a healthy balance sheet, strategic acquisitions, and an impressive number of graduates landing applicable employment. Management states that only 5% of revenue comes from private loans, which should help to offset negative credit markets. Enrollment was up 12.6% according to the latest quarterly announcement, so it appears the company is growing at a healthy clip.

But liabilities to investors include a stock price that is high compared to reported earnings, account receivable balances that indicate difficulty in collecting tuition, and a difficult consumer environment that will make it difficult for willing students to be able to afford further education. In the past, consumers have been able to charge tuition to credit cards - running up balances while increasing potential earnings power. But the personal credit available to most consumers now has been diminished. This will not show up on private loan stats, but could very well affect enrollment in the coming year.

With the stock priced for robust growth, and the sector being one of the last “safe” groups that has not been hit by a turbulent market, you can bet many managers have a significant amount of assets parked in these stocks. Any disappointing news could easily send these stocks lower, and we have already experienced movement from Apollo’s positive news.

So I continue to expect losses in the for-profit education market and would avoid (and potentially short) DeVry. In fact, you may want to sell the stock, and use the proceeds to pursue a better education.

Comments

[investor88:]

Insightful article on Apollo, Devry and Capella. Rightly be cautious or short because if the markets go lower these stocks with their rich pricing will not be immune.

Jan 12 06:20 PM

[Robert Wein...:]

Very astute observations on APOL. The weekly chart for me shows that APOL is close to a pivot point where I will make a short entry.

Jan 13 08:42 AM

[Marty0116:]

It is now Jan. 22 and the stock is up big time since this article recommended investors sell or short it.

I think it is more likely going to 70 than 52.

Jan 22 04:35 PM