Why Jim Chanos's Short Call On APEI Makes Me Want To Go Long

Oct.19.11 | About: American Public (APEI)

Hedge fund manager Jim Chanos has been short for-profit education companies for a couple of years now. Regrettably for those who’ve elected to have his firm, Kynikos Associates, manage their money, while this industry has been down, it hasn’t been “hedge fund” down – that its to say, enough to make the really big bucks.

Is Mr. Chanos talking these companies down just to pad his book? I don’t think so. I think he is truly offended that “some” such firms attract relatively under-qualified students who only want to get a college degree, not to become educated persons, but in order to get a job or a better job. Often these students take out high-interest-rate loans and then find to their chagrin that employers are underwhelmed by their online or night school degree, leaving many of these people with large debts and employment prospects that aren’t too thrilling, either.

Beyond what I read in their SEC filings and third-party articles, I can’t speak personally to the business models, ethics and motivations of most of these firms. Maybe some are “predatory” as Mr. Chanos says. (Not unlike hedge fund managers!) I can’t speak to whether they are a “national shame” – his words again – but I rather doubt it.

If one only seeks an education to get more money, then I suppose it would be a shame if you spent X and only made X less 20% as a result. But the national shame to me is that we try to reduce the intellectual, social, spiritual, confidence-building, more-educated-voter benefits of a broader education to: If you spend X, you are supposed to see a financial return on investment as well as or in lieu of enjoying the intellectual, philosophical, etc. benefits. Whoa – maybe someone should tell the Liberal Arts majors who, upon graduation, may or may not land a better job but throughout their lives have a foundation for critical thinking, recognizing false syllogisms, appreciating music and art, etc.!

I may not be able to comment on ITT Education Services (ESI,) DeVry Inc. (DV,) or Career Education Corp. (NASDAQ:CECO) from personal experience. But I certainly can in one other instance. Along with those named by Mr. Chanos, another for-profit educator fell today and, in this case, I believe Mr. Chanos and the short-sellers couldn’t be more wrong. While American Public Education Inc. (APEI,) the parent of American Military University (NYSEARCA:AMU) and American Public University (APU,) offers degree programs in a number of areas, it specializes in two areas: military studies and public service studies (for police, fire, EMTs, etc.)

I know. I studied there. Early in my military career, I was told I’d never be promoted to the higher ranks of the military without an advanced degree. Partly because of a not-altogether-unhelpful stubborn streak and partly because I was too busy deploying and taking assignments in the world’s garden spots (not) I never got around to doing so. But later I decided that, even though I had reached my highest rank in the military, I wanted to learn more simply for the sake of learning and doing better in my existing job. No one was going to pay me any more, but I would have the satisfaction of knowing that I was considering many more issues, borne of my studies, when writing plans, analyzing our enemies, or performing the missions.

I received my master’s degree in Military Studies, with honors in Unconventional Warfare, from AMU. I can assure Mr. Chanos that my fellow students were not “unqualified, non-traditional” students. The level of discourse and the quality of analysis was every bit as elevated as it was at UCLA, the land-grant university from which I earned my undergraduate degree, or the Kennedy School of Government at Harvard or the Air War and Naval War Colleges and the National Defense University where I enjoyed further studies with some of the best and brightest in the country.

I enjoyed the experience so much that I later became an adjunct professor for AMU, where I taught such essential courses to our military, law enforcement and Intelligence Community professionals as how the disparate parts of the Intelligence Community interact, tracking Illicit Finance, and the differences between police and military Interrogation.

I thought my fellow graduate students were highly-motivated! As a professor, my undergraduate students were often working on their papers and discussing world events in our classroom online forums at midnight after returning from 10 hours of patrolling in Afghanistan. These are not under-achievers hoping to make more money! They are among our best, our brightest, our toughest, and our most highly-motivated. What they learn may have direct application to the success of their mission. They know it and they work to those ends.

So I’ll respectfully disagree with someone who manages more money than I do. APEI serves more than 90,000 adult learners worldwide and offers degree programs in fields like homeland security, military studies, intelligence, and criminal justice (as well as some others – the area of the Venn diagram where they may overlap with the other firms named by Mr. Chanos.) The university is nationally recognized for its best practices in online higher education, accredited by The Higher Learning Commission, and is a member of the North Central Association of Colleges and Schools.

And yet the stock fell from Monday’s close of 37.76 to a low Tuesday of 27.20. Their earnings are the same, their ethics are the same, their management is the same, etc. The only two flies in the ointment I can find are:

  1. The Marine Corps has made the decision that it will only provide still-serving students with $175 per semester hour for undergraduate courses, down from $250 previously. Since about 62% of APEI’s students are U.S. military, this raises the concern that the three larger branches of the armed forces may decide to do the same. Clearly that would impact APEI’s bottom line. On the other hand, I attended using my GI Bill benefits and paying the rest out of my own pocket, so a diminishment of this one program that pays for actively-serving members to enhance their education does not necessarily affect 62% of the students. I’ll try to determine if those numbers are broken out separately in APEI’s annual and quarterly reports. My guess is, if it comes to pass, it will impact profits, but certainly not enough to explain a 25% loss in one day.
  2. If the rest of the industry is found to have engaged in unethical practices, even the good kids will be tarred with that brush.

Beyond those two issues, I see nothing organic in APEI’s business model that has changed or needs to change. They attract some of the most highly-motivated students in the world, give them a quality education and, if student comments and results are to be believed (and what better feedback is there?) the students believe they made a great decision to attend APEI’s online classes and forums. I believe they will continue to.

We purchased shares of APEI yesterday. It would have been nice to get some at 27 and change but by the time we surveyed our watchlist, which we do roughly every hour, cooler heads had prevailed and it was pushing 30. We paid 29 and various cents. We also quickly wrote some puts to open on the March 2012 “25”s. We received 3.80 per contract, giving us, if these are exercised, shares of APEI at 21.20, or 12 times trailing earnings.

APEI is certainly not as conservative as the Total (NYSE:TOT), Telefonica (NYSE:TEF), Natural Resource Partners (NYSE:NRP) and other companies regular readers visit us to find, but sometimes we think we see $20 bills floating down the creek near our home and we are sorely tempted to just pick up one or two…

Disclosure: We, and/or those clients for whom it is appropriate, are long APEI as of yesterday. (I have not taught for AMU for over 18 months, have never owned shares of APEI stock until yesterday, and am not affiliated with nor do my views necessarily represent or reflect the views of APEI.)

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Disclosure: I am long APEI.