It is election season. Both sides of the aisle are in a bitter battle on the way to first debate just a couple weeks away. Much of the bantering this election season has been superficial with each candidate having their fair share of flaws. Both candidates are considered some of the most hated candidates of all time.
But under the superficial bantering, I've been looking for investment themes and trends of significance in the decade to come. A recurring theme from both parties has been the costs of higher education. College is expensive, and today the average graduate is leaving campus with about $28,400 in student debt. Student debt is now the second largest type of consumer debt, second only to credit cards.
Higher education is important for the long term economic growth of the United States. But over the last decade, rising costs has put a weight on millennials and the economy.
Both Clinton and Trump have offered suggestions on how we could lower the costs of higher education. And, Bernie Sanders before he dropped out of the race, was very vocal about making higher education more affordable.
Regardless of political affiliation, it is hard to argue against making higher education more affordable. In my opinion, the key to making higher education more affordable is to lower the fixed costs on campus. Maintaining a college campus and a dedicated faculty is expensive. And, after talking with a number of college administrators I've been repeatedly told that the reason for rising tuition prices is due to an increased cost of goods sold for the colleges themselves.
Higher education is an emotion issue. Does everyone need to go to college? I don't know, and frankly I don't think so. That said, does every parent want their child to go to college? Yes. And most high school graduates want a college education as people with a bachelor's degree make 84% more over a lifetime than high school graduates.
Where am I going with this article?
I think Chegg (NYSE:CHGG) stands to benefit from all of this talk about reducing the cost of higher education. Since beating analyst estimates during the second quarter, Chegg shares have been on a hot streak. Since the second quarter report was released, shares of Chegg are higher by a whopping 26.7%. But since over the last year, shares of Chegg are down by 4.5%.
On the last quarterly conference call, Chegg management was very positive when talking about the company's services business. Chegg reported that its services revenue increased by 33% year-over-year to $29.9 million. Included in its services business, Chegg Study, sustained a 78% renewal rate in the quarter.
Specifically, the company's tutoring business was strong with over 70% growth in tutoring minutes on a year-over-year basis.
Today, Chegg is replacing many of the high fixed cost services offered by colleges and universities, such as tutoring and career search.
Tomorrow, Chegg will continue to invest in online learning. Chegg understands better than most that the next generation of college students will use technology to learn. Chegg will not become a college, but I believe Chegg will be able to lower the fixed costs for students through its services business.
Regardless of who you want to win the election this year, your candidate is probably talking about reducing the costs of higher education. I believe that Chegg is a great way to invest in the theme of lower higher education costs. The stock has been on a run as of late, so I would suggest selling puts as a way to get exposure.
Specifically, I'm looking at the January 20, 2017 put at the strike $7.5. According to Nasdaq, you should be able to collect about $1.00 per contract by selling the $7.5 puts. You could realize a 13% return from now up until January.
Chegg shares would need to drop by 8% from now until January for you to experience a loss. And frankly, I would be fine establishing a long position in Chegg at an adjusted cost of $6.50 per share. Yes, it is a bit abnormal selling an in the money put, but I believe that shares are going to continue to move higher into expiration. And, I am fine with getting exercised and buying Chegg stock at a cost of $6.50 per share.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CHGG over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.