David Waldron

Author, blogger, value, long-term horizon
David Waldron
Author, blogger, value, long-term horizon
Contributor since: 2013
Company: David J. Waldron, LLC
Your statement is more about the students the for-profits attract, than the schools themselves. If the nonprofits admitted these same students, their default rates would be the same or worse than Apollo's, which in the scheme of things are not relatively bad outcomes.
Regardless, where would you like these students to go for their career training if the government forces out the Apollo's of higher education on behalf of concerned taxpayers like yourself?
Most likely a combination of a saturated landscape of culinary schools in North America, plus the burden of gainful employment. As I have written in my articles on for-profit higher ed, due to its high capitalization and operating costs, culinary education is pricey. But entry level job pay is disproportionately lower. Students enroll anyway because they want to be a chef, and a professionally trained one at that. But gainful employment regs, as written, are likely to eat up culinary programs. (pun intended.)
I do not make individual stock recommendations, but overall the online colleges might do best with gainful employment since in many cases the students are already professionally employed when enrolling. That student is attending for promotion or career change.
Gainful employment aside, in my book being released this month on Amazon and Kindle, A GREAT PLACE TO LEARN & EARN, I write about the sector returning to legacy enrollment, quality training, and being regulatory compliant in order to profitably contribute to twenty first century workforce development.
Look for companies that are doing that now. Those are your value plays.
Thanks for the article. I mostly agree with your general thesis. BPI is down over 80% since my bearish article was published in August 2013: http://bit.ly/1cgNlm4.
Regardless, as a veteran industry insider, I am compelled to challenge some of your industry specific statements in the article as they appear inaccurate and therefore unintentionally misleading to the uninformed reader.
----The 90/10 rule was put into effect by the 1998 Higher Education Act (HEA) Amendments (P.L. 105244), replacing its predecessor, the 85/15 rule, which was authorized by the 1992 HEA Amendments (P.L. 102-235). And not by Arne Duncan in 2009 as stated in the article. Ok no big deal as the regulation itself is as you state. However, in 2011, the Obama administration did remove the Twelve Safe Harbors of the HEA which allowed certain incentives to motivate staff to increase and maintain enrollment and retention. In my view this generated subsequent steep enrollment declines in the sector more than any other factor including the improving economy, regulatory issues, or bad press.
---Regarding the pending Gainful Employment rule: the article states "Secretary Duncan estimated that 99% of for-profit schools would not meet the new disclosure standards." What he really said is 99% of programs that fail gainful employment standards will be from for-profit schools. But his actual statement is also a bit misleading because virtually all programs at for-profits, including degree programs are affected by the reg, while only certain vocational certificate programs at nonprofits are affected. So therefore his statement is arguably a twist on the obvious: gainful employment is targeted at for-profits, therefore they will naturally be most affected by it. It is by design. But 99% of for-profit companies or their programs will not fail. Not even close. It's important to set that straight.
---As I imply above, the article seems to focus on gainful employment targeted at entire schools, but in reality it only affects individual programs. This is a significant disparity. Bridgepoint theoretically could lose a program or two, but unlikely would be shut down as a company because gainful employment is measured on a program by program basis only. And why would any company, including BPI keep an academic program they know would fail the gainful employment metrics? I often have argued that gainful employment, if implemented, will be very manageable, especially by large companies like Bridgepoint that have the resources to tackle it.
---This also why Bridgepoint cannot be compared to Corinthian on an apples to apples basis. Corinthian's demise was based on the entire operation not just certain programs of study (though I agree that any regulatory issues in general could lead to sanctions at any education company.)
---Graduation rates as figured by the Department of Education are flawed in their perception because they only count first time, first year students. Many online universities enroll transfer students who do not count in these official statistics if they do graduate. Granted, a 21% official graduation rate is concerning.
---My understanding is that gainful employment, if it gets past the courts this time, will focus on the graduate's income to support any loans more so than the job obtained. One reason for-profit companies like Career Education are shedding on-ground vocational programs in favor of online degree programs is that most online students are already gainfully employed at enrollment, whereas most vocational student are not. Your typical online student is earning a degree part-time to improve opportunities, such as promotions or pay raises, as opposed to creating an entry level opportunity. These students will have often already met gainful employment metrics at enrollment. My last check in 2014 showed BPI had 91% of its graduates employed, including those who were employed at enrollment (perhaps most of them were gainfully employed pre-enrollment.)
---It seems clear that non-degree for-profit vocational programs (cosmetology, massage therapy, culinary, automotive, allied health, etc.) will be the biggest losers if gainful employment is implemented. I find this very concerning to our workforce development as career opportunities for non-academics (estimated at 65% of U.S. population) will be potentially cut-off. Who is going to train them? Community colleges? Good luck with CC's handling the entire game as President Obama is hoping.
--- According the article: 'When speaking about for-profit education, famed investor Jim Chanos has said, "None of the companies can exist without federal loan guarantees." Chanos is right.' He is right to a point. What Chanos always fails to mention in his bearish comments on for-profit education is that significant numbers of nonprofit colleges and universities are also tuition dependent and therefore rely just as heavily on Title IV funds as the for-profits. What is good or bad for one should be likewise good or bad for the other.
---I fundamentally agree that BPI is a high risk stock, but disagree it is even near the risk level suggested in the article.
I stand here not to be merely a faultfinder nor a defender of BPI, but simply as an ongoing defender of a sector that repeatedly gets slammed by the media with misleading and distorted information, Seeking Alpha sometimes being no exception.
Agree. Apply to ALL college programs that lead to a career: accounting, engineering, physical therapy, social work, economics, marketing, nursing, the list goes on.
Only certificate vocational programs at nonprofits are affected by gainful employment. None of their degree programs are included. Most for-profit programs are, including degree programs.
In my opinion as an industry expert, Gainful Employment was written with one purpose: to destroy the profit motive in education. It did not survive the courts in its first go round. And may not survive this challenge either simply because it is designed to eliminate more so than regulate.
Why aren't all college programs included? When was the last time you met a college student who was NOT attending primarily for career attainment?
Gary, where did this math come from? Please link a source. I ran for-profit career colleges for years and typically spent 45-50% of revenue on educational services and facilities typically much higher than spent at traditional colleges (nonprofit). We also paid income, real, and personal property taxes. The nonprofits don't.
Your math assumes a career college pays just 1/2 of one percent of revenue on instructors. It is very wrong, misleading, and has no place in a professional investment forum like SA.
Frank, you are certainly entitled to your opinion but what is your source other than the mainstream media who are ideologically against the profit motive in education (but ironically ok with making a profit from providing news content?)
I ran for-profit career colleges for twenty-one years with strong compliance records and successful outcomes for a majority of my students who were mostly first generation minority and at-risk college students. We served them because the traditional college community refused to.
And community colleges which are virtually 100% funded by taxpayers sport an average graduation rate of 10% (30% when generally including transfer rates regardless of whether the transfer resulted in a degree.) Why aren't you complaining about them fleecing taxpayers?
Painting a broad brush does not serve this forum well. I suggest you research Grand Canyon University (LOPE) for an example of a for-profit that plays the game the right way.
Fair enough. "Confirms," "reports," "writes," "reminds us." All the same.
I read recently where Buffet said he was happy IBM stock had declined as it would afford him the opportunity to buy more shares and thereby lower his average cost basis. This article confirms he went ahead and took advantage of his perceived opportunity. You have to admire an investor who is LONG a company and delighted that its share price is dropping. An authentic contrarian indeed. (I am long IBM.)
Your points are all valid ones. My point remains: With only about 30% of adult Americans with at least a bachelors degree, the traditional higher education elite including state colleges ultimately serves only about 1/3 of Americans successfully.
And what good is free community college if only 10% of students graduate (30% if you generously count transfers to 4-year colleges,) based on national averages?
The proverbial system is gamed to only serve a relatively small percentage of the population. The "deserving 30%" I guess they are referred as by the tenured, unionized faculty that welcomes them as invited guests.
The higher education industrial complex (traditional colleges, elected government, affluent alumni/parents, and mainstream media) focuses curiously on the 30% who SUCCEED in traditional higher ed (those who graduate with bachelors degree or higher) and then in turn on the 30% who FAIL in for-profit higher ed (those who default on their students loans.)
What about the ~70% of traditional higher ed students who fail (drop with no degree) and the ~70% of for-profit students who succeed (complete their program)?
When speaking of elite traditional higher education, I agree. But they ultimately serve less than 30% of Americans (graduate with bachelors degree or higher.) What you speak of is the elite part of the higher education industrial complex that serves primarily those born with a long straw of socioeconomic status.
But what about those born with a short straw of socioeconomic status (majority of Americans.) The Republicans aren't interested except for their vote based on fears and prejudices; and the Democrats think community colleges can take care of all of them (not.)
That is where ethical private sector education comes in (for-profit). Instead of being capitalized by a politicized government (public) or alumni and corporate controlled endowments (private) the for-profits seek private capital to fill the needs of the shorts straws who are neglected by the privates and mishandled by the publics.
Student loans and grants directly capitalize students, not the institution. But ethically run for-profits have proven they can handle the millions of students who are rejected by the traditional elite educators and failed by the purely government and union run schools such as community colleges.
Otherwise it's back to 'rich kid goes to college and poor kid goes to work.' Is that what we really want? Perhaps it is the ultimate elite attitude to higher education. But I fundamentally disagree. Everyone deserves a shot at higher education whether at the diploma/certificate, associates, or bachelors degree level. Whatever they are best equipped for from personal levels of intellect, economics, career interest, desire, and motivation.
My support of Bandit 444 and Teutonic Knight's original comments was an endorsement of each's first comment as opposed to their obvious political alignment from subsequent posts which I do not support.
I write often that for-profit education (my industry) thinks voting on party lines (in this case Republican) will solve all their problems. It hasn't and won't. But 'playing the game the right way' will solve their plight.
As an insider, I was never a fan of Corinthian Colleges, which closed its remaining campuses today leaving 10,000 students on the street. I more than once witnessed someone fired for ethical violations at a compliant education company and CCI would then hire them. Enough said.
But I also question the democratic party's seemingly blind support of nonprofit education. Lots of problems there as well. All are part of the education industrial complex which aches for reform throughout.
Article does make worthy points. For-profit education has been its own worse enemy. But the blanket comments against the sector are unwarranted. Someone might be watching with enthusiasm a public or nonprofit university sports team compete with a $6 million dollar coach and then post here that for-profit education is a scam. Wall Street-Bandit444 and Teutonic Knight are onto the bigger more relevant picture that the entire higher education industrial complex is in need of reinvention.
As far as APOL? I can only think of this quote by Sir John Templeton: “Focus on value because most investors focus on outlooks and trends.”
This article gets it. Take initial ownership of a wonderful, enduring company on the cheap. Purchase more stock at reasonable prices when Wall Street beats it down by reacting to quarterly noise. I am long MSFT.
JJ Cassidy is on point for this one. My argument during Gainful Employment (GE) debate is what's the alternative for all these low income, first generation students who would be shut out of the for-profits if GE gets thru the courts and is implemented July 1 as planned? Well, the Obama administration has answered. Make community college free so these students have a perceived affordable alternative.
But here are the issues beyond the expected "who's going to pay for this" argument:
1) Thousands of students a year already consciously choose $15K for-profit programs over $5K community college programs because the CC's are generally overcrowded and more difficult to schedule classes; require abundant amounts of basic skills prep courses, and lack other flexibilities typically available at the for-profits.
2) Graduation rates at the CC's (generously including transfers to 4 year colleges) are about 30% average nationally. If the rates do not improve, and my experience says "free" means less motivation for student to persist, that is a lot of wasted taxpayer dollars.
3) "If it's free it's for me" is very appealing when personal funds of a young person are in short supply so this will be a popular program if it gets passed the republicans. Granted the proposal limits the subsidy only to students who maintain satisfactory academic progress.
4) Much of the CC student's tuition is now covered by free Pell Grants anyway so this would be more of a transfer of the same federal tax dollars but also force the states to chip in (again) after they have moved away from CC funding in recent years.
My take would be to invest the same allocated money in the CC's themselves to expand them and make them more accessible and friendly to students instead of long wait lists to get into a program, etc.; and remove hurdles to successful completion. And this way the student continues to pay and has a sense of investment even if a Pell Grant is subsidizing their tuition.
My two cents...
David Waldron
SA Contributor
Publisher, Edu Investor
Scott,
Congratulations! Your book looks like a winner and I enjoyed reading Bram de Haas' review of it here on SA. And your donation of all royalties to charity is an exceptional gesture. Here's to achieving bestselling status!
I have contacted TipRanks in the past to dispute or update its rankings on some of my SA articles and they have corrected each time after reviewing. Bots or crawlers collect the initial info, but they have proved to me they are willing to have a human go in and look at reported discrepancies.
This is great news and a solid validation of SA's impact on the markets. Congrats to all the contributors making the top 5 lists!
Three more tickers for On Watch: CECO, UTI, and GHC (over 60% of revenues from Kaplan).
Interesting how you can switch to nonprofit and all ills seemingly go away as in Herzing and next up Grand Canyon (LOPE), a quality operator that wants to rid itself of the "stigma." of profit making from higher ed. Just a stark reminder that all higher education needs to be on watch regardless of tax status. Herzing allegedly switched to avoid Gainful Employment rules and for its students to get state aid only available to nonprofits. Grand Canyon was allegedly derailed by the $900K a year president of state taxpayer owned University of Arizona. And Jim Harbaugh reportedly will get $35 million to coach football at state taxpayer owned University of Michigan. And those are considered "victories." No stigmas there, apparently.
Mainstream media, including some contributors/commenters here on SA, have blasted for-profit ed, presuming all students fail at hands of the operators, which is a gross misnomer. Granted, sector has done horrible job in promoting the thousands of success stories coming out of their schools. Or maybe media simply is not interested in writing about successful auto mechanics, pharmacy technicians, dental assistants, hairdressers, and electricians?
Polar opposite on nonprofit side of ed that will convince media and public that paying Harbaugh $35 mil is good for higher education (uh, I mean college football). Make a $35 million return from investing in actual education and you'll be labeled a predator. It costs capital to build labs or online platforms for typical for-profit type vocational and academic programs. States cannot afford them and endowments aren't allowed in the sector. Private and public market investors are needed to capitalize these critical training programs for those born drawing short straws, economically, and/or blessed with lower IQs not welcomed in traditional higher ed.
Chris,
Very nicely done counterintuitive piece. As a fellow contributor who writes exclusively on my industry, education services, I guess I am one of those "who can't help themselves." :) Kind of a Peter Lynch approach to SA writing: 'invest in what you know' becomes 'write about what you know.'
Regarding some of the comments here alleging SA editorial bias toward page views and new subscribers - it is a business, isn't it? However, my experience as a contributor has been counter to those concerns: I write about a small sub-industry and thus get relatively few page views and comments. And to maintain independence as an insider, I do not take investment positions in the education companies I cover. Yet SA editors have published all but one of my overall submissions; have selected all of my premium submissions, including several for SA PRO; and chose one contribution (like you, Chris) for outstanding article performance.
This tells me inherent expertise, a commitment to quality, plus depth and breadth of coverage are equally important to growing revenue streams at Seeking Alpha. I am happy to be a small part of this great investment forum.
Ruerd, thanks for reading the article and your comments. I appreciate your counterpoints, particularly your cash flow analysis. As an industry observer exclusive to education, I tend to avoid price projections or tangible margin of safety based on DCF in my articles as they require too many assumptions that I believe are best left to readers who confidently engage in those calcs.
I write exclusively about EDU companies that trade on major US exchanges and keep on the lookout for potential business inflections either bullish or bearish. In the case of ABCD (I like your 'promotional' label) it's the perceived quality products, a broad and growing market (sadly if your a student's parent), and what I interpret as politically safe federal funding. The ball of opportunity is there for Cambium to take it or drop it.
And like you, I am a student of value investing and therefore in my articles try to compliment bottom up fundamental/value/risk metrics with my top down business thesis. But always with the intent of the reader taking the inflection thesis and putting it to their own financial analysis as you have prudently done here.
I agree on the balance sheet issues and that is why I chose to magnify the long term debt to current assets issue to remind readers this is a speculative stock. In regards to ordinary insider selling, I tend to take it at face value not knowing if the sale is truly investment based or a personal financial 'need to pay my kid's tuition' kind of motivation. And KSS recently converted 750K options at $0.01. So a sale at $2 would be a 200 bagger. Why not?
Your short suggestion is certainly worthy and I commend you for great bearish calls on CBSTZ and GCVRZ. I think Cambium can go either way but here I decided to run with an asymmetrical view based on the macro opportunity in their competitive sub segment of K-12 which is nearly half the market.
As an industry expert learning financial analysis, I like to think of myself as the polar opposite of a sell-side analyst who is a financial expert learning an industry. Therefore, I welcome all feedback, whether a confirmation or counter. Thank you again for your wise and meaningful response to my thesis.
Author update on article: Immediately after the article was submitted last February, ITT Educational Services issued a release claiming the CFPB complaint was without merit, should have never been filed, and asked a court to dismiss. CFPB has since also filed against much maligned Corinthian Colleges (COCO). On May 22, ESI fell 24% on an unsubstantiated rumor that Bill Ackman’s Pershing Square Capital was short for-profit education stocks. In August, CEO Keven Modany announced plans to resign from ITT Educational effective February 2015. The news followed the unraveling of property sale-leaseback agreement that I had original speculated was an internal financial reengineering, but was actually a third party, and it pulled out of the high profile deal. ESI dropped 31% on the Modany resignation. The stock fell another 37% on September 19th after disclosing it received a Wells Notice from the SEC. But yesterday the stock rebounded 20% on what was widely seen in financial social media as a short covering based on technical analysis. The company still has not submitted its 10-K as disclosed last March; but did boast in a news release that 70% of recent grads were gainfully employed; that graduate salaries, on average, had almost doubled from before the student enrolled; and that ITT Tech’s graduation rates were double that of community colleges. In the release the company boasted program affordability, but once again attributed the tuition reduction to scholarships. Apparently transparency has improved; tuition discounting continues.
This is a knee-jerk response to a normal course of regulatory business in all of higher education.
Ordinary program reviews from US Department of Education [ED] are customary for all schools, colleges, and universities administrating the Title IV financial aid program. Granted, program reviews by ED at for-profits have ramped up in recent years.
Regardless -6.2% after hours does not make sense on this news alone. If these selling shareholders of APOL were nervous about the company's federal compliance, they should have sold at $35 or at least when competitors COCO, ESI, and EDMC were first making headlines on compliance issues.
As a consumer, I agree 'something has to give.' Other than the four networks, PBS, and some basic cable channels (CNBC, CNN, etc.) my wife and I watch primarily just two "bundled" channels: ID Discovery and MLB Network, respectively. But in order to get those two specific channels, our cable provider Cox Communications (privately held) requires us to pay for upwards of 500 channels.
As an investor, it is a matter of time before a technologically advanced internet TV takes over (Web 3.0) and these content providers take it on chin, or better yet, add Netflix, et al to their set-top boxes (Roku inside the cable box kind of thing).
Also, the M&A activity is intriguing. Isn't that usually a precursor to an industry reinventing itself, or worse desperately hanging on to what used to work, through consolidation?
Thank you for reading the article! As always, questions and/or comments are always welcomed, including contrarian views or challenges to my thesis.
Thank you, Colin, for the shout out (much appreciated) and Papa of Four for the nice acknowledgement. Just saw this today (4/8/14) so I apologize for missing when originally posted.
Insider-Alerts, your call is certainly on the winning side here. Mine? Well not so good. But as a value investor, patience combined with your suggestion in unloading the RE division, could give this stock a needed bounce down the road. Therefore, now would be the time to act, or not. I will be on the earnings call. Thanks as always for your comments.
Jimmy Mason, thanks for reading and for your comment. Very good question. ESI has historically been one of the sector's favorite among growth and momentum investors. That could explain why it trades about 33% higher than its peers in relation to book value. But your observation of its precipitous drop from 10 P/B over five years is noteworthy. In deference to my article's thesis, that may be a result of momentum investors losing interest in recent times. The stock is down about 78% during that timeframe.
Highwater 888, thanks for reading and for your comment. Between the CFPB and gainful employment focus on the for-profits; and President Obama's pending ranking system of traditional higher education, one could argue that any tuition dependent college dispersing federal financial aid could theoretically be on the brink.
I encourage comments on this article before it embargoes in early April. Embellishment or disagreement on my thesis are both welcomed. Thanks for reading!
The freeze up on TEVA was all about Copaxone coming off patent and how the company would deal with potential revenue dive. I took a page out of Howard Marks and bought it anyway simply because it was cheap. Up 25% while the analysts slept. (Long: TEVA)