A couple weeks ago, Steve Eisman of FrontPoint Partners (made famous by Michael Lewis’s The Big Short) made an epic takedown of the for-profit education industry at the Ira Sohn Investment Conference in New York. Eisman titled his talk “Subprime Goes To College”.
Eisman showed that these companies are highly dependent on government Title IV loans with close to 90% of their revenues coming from them in many cases. He showed that graduation and default rates are terrible. He persuasively made the case that they are marketing machines with the purpose of sucking up government funds disguised as universities. The whole 47-page, chart and data-packed, presentation is available from MarketFolly here.
You can also read an excerpt from his talk from Sunday’s New York Post here.
The for-profit education stocks are a fascinating battleground because growth and valuations are extremely attractive. In fact, I myself bought Apollo Group (APOL) for just these reasons. For example, see:
“Apollo Group Crushed For No Good Reason”, Top Gun FP, April 1, 2009
“Why All The Haters On Apollo Group?”, Top Gun FP, July 1, 2009
However, I began to question these companies and stocks after a critical Barron’s cover story which I discussed in a Client Note (“Top Gun FP Client Note: Let The Bubble Blow”, November 10, 2009).
Eisman’s talk makes many of the same points as the Barron’s cover piece, but with more data and more persuasively.
I am definitely viewing these companies’ fundamentals in a different light after reading Eisman’s tour-de-force.
Disclosure: Top Gun is long shares of Apollo Group (APOL).