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One of the largest legal scams in the country is beginning to unwind - it will take years, and the lobbyists for this industry will push back hard with intermittent success but the scamsters have been outed and the future is clear. I don't use the term scam lightly - that is pretty much the conclusion of a scathing Senate report published this past May.

I am talking about the for profit education sector.

The unwinding of this sector became evident after the close yesterday when The Apollo Group (NASDAQ:APOL), parent of The University of Phoenix, announced previous quarter earnings that fell, revenue that fell and more importantly, enrollment that fell more than 13%. The stock was hit in after hours trading and opened this morning almost 10% down and at a price point lower than any I could find for the past ten years.

The University of Phoenix is the most successful of these outfits when you look at data on their matriculation and graduation rates - and they are still abysmal. According to a Senate report, quoted in the New York Times,

The Apollo Group, which operates the University of Phoenix, the largest for-profit college, got $1.2 billion in Pell grants in 2010-11, up from $24 million a decade earlier. Apollo got $210 million more in benefits under the Post-9/11 G.I. Bill. And yet two-thirds of Apollo's associate-degree students leave before earning their degree…. Students at for-profit colleges make up 13 percent of the nation's college enrollment, but account for about 47 percent of the defaults on loans. About 96 percent of students at for-profit schools take out loans, compared with about 13 percent at community colleges and 48 percent at four-year public universities.

The crackdown has begun. Going back to that Times article,

Colleges with very high loan default rates in the two years after graduation (now changing to three years) lose their eligibility for federal student aid. As a result, the report found, many of the for-profit colleges try to move students having trouble with repayment into deferral or forbearance until they are past the years the government monitors.

A summary of the report can be found here, and the full reports can be downloaded here.

The bottom line: do you think this largesse will continue as federal deficit cutting becomes the only thing Congress does for the next few years? The answer is obvious and so is potential for big downside movements in these companies' stocks. The publicly held players in this space are:

  • The Apollo Group - APOL
  • Career Education Corporation - CECO
  • Corinthian Colleges - COCO
  • DeVry - DV
  • Educational Management Corporation - EDMC
  • ITT Educational Services - ESI
  • Strayer - STRA
  • The Washington Post (Kaplan subsidiary) - WPO

Disclosure: I do not manage money other than my own. I am not nor have ever been short any of these stocks in my own portfolio and will not short them going forward. In my service Short Side Trader I have recommended puts on COCO and APOL.

Source: The Beginning Of The End For For-Profit Colleges?