The College Education Shakeout Has Just Begun

Includes: APOL, BPI, COCO, DV
by: Dana Blankenhorn

Have you invested in a for-profit college or training program? Get out while you can.

The warning gun was sounded yesterday by DeVry (DV), which posted disappointing results and led the whole group downward. Investor David Einhorn was reportedly shorting Apollo Group (APOL), the market leader which owns the University of Phoenix. The pain has just begun.

The industry's problems do not stem from its business model - replacing people with computing as much as possible - so much as its financing model. The group is a big user of private student loans - 42% of its students use them against 14% of public and non-profit students. This area has just popped its own version of the sub-prime bubble, and while the totals aren't as big as they were for housing 5 years ago, they are still large enough to scare new money from the sector.

The sector is also being hurt by the difficulty some programs have in getting students placed in jobs. Corinthian Colleges (COCO), for instance, has 40 programs that don't meet guidelines under which just 35% of former students have to be repaying their loans. The stock is down 50% from its February highs and its future is uncertain.

The sector is also facing new pressures from accreditation agencies. Bridgepoint Education's (BPI) Ashford University was recently denied accreditation, tanking the stock. The sector is fighting back in court - loan payment regulations were struck down early this month - and politically - Gov. Romney has the sector's back and they have his. But expecting politicians to run to the rescue of your portfolio is often a bad bet.

This is actually the first stage in what will be a multi-year higher education crash for which the sector sought to be the solution. Presenting information and testing competence can both be automated. Buildings and people aren't needed. Productivity can skyrocket, especially with schools like Stanford and MIT bringing out online curricula.

But the shakeout will take years to play out. Many public and private colleges will close, as will many in the for-profit sector. Only the strong will survive. I think Phoenix will be one of those survivors, but I wouldn't buy any shares in APOL until I have more visibility.

The storm overhanging this sector has just begun.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.