Where is the smart money hiding? The absolute easiest slam dunk short of 2008 was the REITs. People were hiding their money in REITs last year during the summer and early fall. It was pretty obvious vacancies would increase, new malls would stop being built, and the massive debt of these companies would be hard to roll over in a tight credit environment. Most importantly, REIT investors get nice dividends that sure looked in jeopardy of not paying. Look at the sector now. Most of the stocks have lost at least 50% of their value since then. I was short SPG, and in my mind, the REITs themselves were layup shorts. I digress.
The point is when every analyst loves a stock or sector and earnings seem to be steamrolling, I usually try to find holes in the story. Enter the education and training services stocks: Strayer (STRA), Apollo (APOL) and American Public Education (APEI). I will focus on STRA as my short candidate.
Strayer Education provides post-secondary education through Strayer University and online. It also runs education loan processing, which was started to administer the Company's student loan portfolio.
So what do I not like about this company, and what do I think the company's fair value is?
1) The Chairman and CEO sold out of 95% of his holdings in the company on December 3rd!
I can understand he might have wanted some extra cash for the holidays but 95% of his holdings in the company. Is he joking? Apparently, he thinks the stock is priced to perfection as I do. How can he be completely upbeat about the company in their latest conference call if he is selling the lion's share of his holdings?
2) Expected growth in earnings per share next year is over 32%. The annual earnings per share growth the past 5 years for STRA is 20%, but suddenly Superman Strayer is going to pick their game up 60% to grow at 32% in 2009 in a recession? Am I missing something? Please spare me that these companies usually do pretty well in a recessionary environment. All these people who lose their job are going to have such an easy time getting loans to go back to school in this tight credit market right? I don't think so.
What do I think is the fair value of the stock? Let's assume that the market prices this stock back to the lower end of its historical P/E ratio to 25 and let's assume new campus openings slow down, there is modest bad debt expense from their loan portfolio, and STRA's growth rate is 20% next year, you have earnings per share of 6.36 and a stock price of $159. Long term, I think the growth rate drastically changes for the education companies. No longer will they be growth stocks but more maturing companies. With that thesis, let's assume a P/E ratio of 18, and growth in earnings per share of 10% from 2010-2013, you have earnings of $9.30 in 2013 and a stock price of $167, 30% lower than today's $218.
My mom always said, "No one is perfect." I usually countered with, "Mom, how do you explain Cindy Crawford then?" She responded, "Even she gets caught without her makeup on." Well, smart money hiding in these stocks will eventually learn that STRA has blemishes too, and the stock will correct hard. I have 60% of my desired short position and plan on dollar cost averaging on strength. Timeframe: medium to long-term.
Here is a link to my portfolio on kaChing.
Disclosure: Short STRA.
