Alpha hunters might consider net-long positions in industries trading at attractive prices, market neutral positions for fairly valued industries, and net-short positions in industries with substantially unattractive valuations. If they are willing to hedge their positions, they can find more investment opportunities than just hoping to find the best stocks to buy today. Instead, they can use fully or partially hedged positions to bet on the mean reversion of different stocks in an industry while minimizing or reducing exposure to market volatility.
A prior article highlighted different industries based on their potential for generating alpha by stock picking. Education and training services stocks appear promising for constructing net-long positions. Attractively-priced stocks and perplexingly precious stocks were identified in the for-profit education industry.
Plots of companies within the for-profit education industry reveal that there are some stocks which are more attractively priced than others:
In each of these graphs a measure of quality or growth is plotted on the y-axis as a function of a measure of cheapness on the x-axis. Historical price-to-earnings multiples, price-to-book multiples, and price-to-sales multiples were used as measures of cheapness. Analyst estimates for earnings growth, historical return on equity, and historical sales growth were plotted as measures of growth or quality. More attractive stocks are found up and to the left while less attractive stocks are found down and to the right.
Three above-trend education and training services stocks are presented in bold and two below-trend picks are listed in italics:
ITT Educational Services
Grand Canyon Education
Universal Technical Institute
BPI, CPLA, and DV were found to lie among stocks in the upper left of these plots (higher quality, undervalued stocks) while STRA and UTI were found to lie at the lower right of these plots (lower quality, overvalued stocks). Based on this work, a net-long position in the for-profit education industry is recommendable. It can be constructed by buying BPI, CPLA, and DV shares while hedging with a smaller short position on STRA and UTI.
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