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After being out of favor with investors for almost three years, for-profit colleges such as Apollo (APOL), DeVry (DV), Corinthian College (COCO), and Strayer College (STRA) were rallying yesterday. Apollo reported strong Q3 results, beating the Zacks Consensus Estimate for both revenues and earnings, even though enrollment continued to decline. Does it mean that the sector has turned the corner? Should investors go bargain hunting in the sector?

It depends on the investment horizon of each investor. Short-term oriented investors may want to trade the stocks on the long-side taking short sellers for a ride (see table for short interest).

Company

Apollo Group

Corinthian College

DeVry

Strayer Education

Short as % Float

21.20

27.13

13.50

32.40

Source: Yahoo Finance

Long-term investors should stay away for a number of reasons:

First, the financials of the sector have deteriorated since last March when Apollo reported Apollo reported better-than-expected profits (see tables). That could explain while that rally faded.

Financials as of March 2013

Company

Apollo Group

Corinthian College

DeVry

Strayer Education

Forward PE

7.22.

7.13

10.50

11.97

Operating Margins

16.7%

4.46%

14.63%

24.99%

Qrtly Revenue Growth (yoy)

-10.50%

4.50%

-7.50%

-10.70%

Qrtly Earnings Growth

-10.60%

--

-89.20%

-28.50%

Source: Yahoo Finance

Financials as of October 2013

Company

Apollo Group

Corinthian College

DeVry

Strayer Education

Forward PE

20..49

8.13

14.50

16.97

Operating Margins

15.49%

3.46%

12.51%

17.39%

Qrtly Revenue Growth (yoy)

-15.60%

-1.70%

---

-9.70%

Qrtly Earnings Growth

-40.30%

--

-

-29.30%

Source: Yahoo Finance

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 yesterday's rally could be attributed to short-covering, as the sector is heavily shorted--Apollo's short-interest, for instance, is 17% of the float.

Sixth, tuition in for-profit colleges is falling.

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.

Source: Are For-Profit Colleges Turning The Corner? I'd Stay Away For Now