Grey Owl Capital

Long/short equity, long only
Grey Owl Capital
Long/short equity, long only
Contributor since: 2010
Company: Grey Owl Capital Management
Portfolio management and security selection are different things.
Rising credit spreads are bad for all risky assets. EM particularly "risky." In addition, strong dollar (weak gold) bad for EM. EM and commodities highly correlated. HCWE has excellent framework - see
Thanks for your comments Portfolio Manager. We totally agree that it is a mistake to generalize about the for-profit education industry. That being said, we still think APOL is one of (if not the) most compelling investment opportunity in the space.
Where are you getting the retention and graduation rates from? We have seen several studies that use the IPEDS data - all with different %s for the same metric. I would have guessed you are citing the 11/9/09 Barrons article, but the graduation and retention rates for STRA don't look good in their analysis. The reason this data is flawed is that it only includes first-time students AND it doesn't account for the fact that many of these students take longer than 6 years to get their bachelor degree. Remember, over half are parents and the vast majority are working a full-time job.
You mention STRA as a much better investment. STRA's CDRs are better than APOLs, but not by that much. We expect STRA will continue to grow at around a 20% rate for some time and that APOL will only grow in the low double digits for a few more years, but we don't think that warrants this big of a multiple difference.
On the other hand, CPLA has spectacular 3-year CDRs: 5.5% for the 2007 cohort. And it will probably grow close to as fast as STRA, but again you are paying 27x TTM earnings. The price is just two high in our opinion.
That being said, there are other stocks in this sector that are reasonably priced and have unique strengths to their business models.
porch441 thanks again for your constructive comments. I agree - the back and forth dialogue is great. As before, I'll try to respond to each of your points.
1. We have reviewed Mr. Eisman's presentation extensively and used it as a framework to check much of our thesis. It is thorough. And, we don't dispute a lot of the data: for-profit growth has been high, CDRs are higher for for-profit than for traditional schools, and for-profits receive a greater % of their tuition from Title IV loans than non-profits. We just disagree with his two conclusions: a) that for-profits are systemically bad and b) that the stocks (in general) are shorts. With regard to some of his other allegations, we would argue that much of his claims around manipulation of CDR, 90-10 rule, and graduation data (p. 24-26 of his report) are unsubstantiated and based on anecdotes. Or at least the report doesn't include the empirical evidence.
2. I think the study by CCA on gainful employment that you are referring to was conducted by third parties for CCA. I believe the study was run by Jonathan Guryan of the University of Chicago who IS an expert in education ( and others from Charles River Associates (an economic consulting firm).
I don't think the study's argument was that "the higher the loan to salary ratio, the more likely a student was to pay off their loans," but maybe I missed this. What I have seen is that a College Board study from 2006 argued that the more people make, the more (as a % of income) they can afford to spend on education. Thus the 8% rule should be (at least) more dynamic. This makes logical sense in the same way that spending beyond food and shelter rises as a % of income as income goes up.
3. Your last point is the most important one. Our APOL investment is not based on a belief that APOL or the for-profit space in general or even all of education is perfect. Clearly, there is much room for improvement in many areas. Our investment is based on the belief that any reasonable new regulation is already priced into APOL's stock price and that the sector is (in general) providing a valuable service and will continue to do so.
porch441 thank you for your comments. I will try to respond to each:
1. Won't the proposed changes to the "safe harbor" rules around recruiting kill the growth story? Frankly, at TTM PE of 11.5 we don't look at this as a growth stock. In our best case estimate, APOL will grow revenues in the very low double digits for the next few years and continue to slow from there. Additionally, the "safe harbor" rules are relatively new - these firms operated without them before and will be able to do so again.
2. Yes, the HELP hearings will be interesting. We are not trying to handicap an outcome based on the presence of a prominent hedge fund manager. But, let's think about Mr. Eisman's position: He is going to argue before Congress for a change in rules that would make him a lot of money. Additionally, why is he an authority on for-profit education? He is clearly an authority on assessing whether or not a stock is fairly valued, but how is that relevant to the committee?
3. We point out in our interview that the $140 figure (it is actually a net gain to the tax payer, not a cost as you wrote above) comes from the University of Phoenix's own report - obviously this should be taken with a grain of salt. The more important point is that in order to determine the cost (or gain) to the taxpayer one can't just count subsidized loans. Government grants to the university as a whole, as well as taxes paid (in the case of for-profit) or not paid (in the case of traditional schools) must also be considered. So, $140 may not be exact, but I don't think "ludicrous" is a proper description.
4. We think there is more that goes into a choice between educational institutions than just cost. It seems to us that the for-profit universities are offering better choices in terms of programs, schedules, and on-campus vs. online options.
5. Actually, the DoEd also started tracking 3-year CDRs. In the comparison between community colleges and the for-profits we used the published (but not yet legally binding) 3 year CDR, not the 2 year CDR as you indicate.
Thanks David. Yes, short covering could provide some upside. Though APOL doesn't have quite the short interest some of the other for-profit firms have. APOL is around 6.5%. Whereas, COCO is at 24.5% and STRA is at 23% (for example).