After being in the doghouse for more than two years, for-profit colleges such as Apollo (NASDAQ:APOL), DeVry (NYSE:DV), Corinthian College (NASDAQ:COCO), and Strayer College (NASDAQ:STRA) are rallying today - Apollo reported better-than-expected profits this morning. Does it mean that the sector has turned the corner? Should investors go bargain hunting in the sector?
Qrtly Revenue Growth (yoy)
Qrtly Earnings Growth
*Fye December 31, 2013
*Fye September 25, 2013)
I don't think so, for a number of reasons:
First, though Apollo Group beat on the top line its revenue decline accelerated from 8.5 in Q3 to 10 percent in Q4, while operating margins dropped from 20 percent to 16.7 percent.
Second, students find increasingly difficult to get loans, as default rates have been growing, from 8.8% in 2011 to 9.1% in 2012. Students missing loan payments cannot apply for federal aid.
Third, for profit colleges have come under close scrutiny from regulators regarding academic standards.
Fourth, online for profits colleges like Apollo Group have been facing increasing competition from regular colleges that develop their own outright programs or blended programs.
Fifth, part of today's rally could be attributed to short-covering, as the sector is heavily shorted--Apollo's short-inertest, for instance, is 17 percent of the float.
Bottom line: What shines like gold may be hay. I would stay away from the sector until I see signs that headwinds are turning to tailwinds. MIT and Harvard, for instance, have developed low-cost non-credit online courses.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.