Bulls Return to Education Stocks

by: optionMONSTER

By David Russell

A cloud of uncertainty may finally be lifting from the for-profit education industry, drawing bulls back to one of the most beaten-down areas in the market.

Reuters and Citigroup said Education Department officials briefed Congress on rules governing access to federal loans and would formally release the regulations today (Ed: see here for the release). Companies such as Apollo Group (NASDAQ:APOL), Corinthian Colleges (NASDAQ:COCO), and Career Education (NASDAQ:CECO) rallied on the news, and option activity turned increasingly bullish as the session progressed.

APOL accounted for about half the volume in the group Wednesday, and was the first to appear on our Heat Seeker program as investors snapped up about 15,000 June 44 calls, most of which priced for $0.95.

The COCO June 4 calls were the second-busiest contract, trading more than 5,000 times for $0.15 to $0.30. CECO's June 23s and June 24s followed with volume of 4,301 and 3,640, respectively.

Including ITT Educational Services (NYSE:ESI), overall option volume in the group was 8 times greater than average. Calls accounted for a bullish 78% of the activity in the four names, with purchases dominating the order flow.

The stocks have been getting killed since April 2010 after government officials expressed an intention to tighten student-loan standards. The 12-month declines range from 17% by CECO and 69% by COCO, but the stocks have shown signs of stabilizing in about the last month.

Although the rules may seem draconian, the market has already priced in considerable negative news. Given that these companies have considerable short interest, little debt, and trade at deeply discounted multiples, clarity on the regulatory backdrop could draw more investors back to the sector.