For-Profit Education Stocks Will Surge Under Trump

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Summary

The Obama administration's policies were harmful to for-profit education companies, and as a result their stocks crashed.

There are many indications that the Trump Administration will be much more friendly to the sector and ease many of the legal./regulatory headwinds it's facing.

As a result, for-profit education stocks are poised for a huge rally.

Beholden to traditional universities and generally hostile to for-profit education companies, the Obama administration hurt for-profit universities with a series of strict regulations and enforcement actions.

As Politico put it in July 2015 "reining in the multibillion-dollar industry has been the administration's goal for most of President Barack Obama's term in office." The website noted that the administration put in place a "gainful employment rule" that eliminates federal funding for for-profit universities whose graduates don't meet certain standards of career success. And as the Wall Street Journal wrote, for-profit colleges believe that the Trump administration will ease "tough regulations that threatened to lead to the closure of hundreds of schools and that drove their stock-market valuations down sharply."

Those "tough regulations" caused the shares of for-profit education companies to drop sharply during the Obama era. For example, over the past five years Bridgepoint Education's (NYSE:BPI) stock tumbled 55%, those of Apollo Education (NASDAQ:APOL) sank over 80%, and those of American Public Education (NASDAQ:APEI) fell 40%. Moreover, the actions of the Obama administration led to the bankruptcies of two other companies in the sector, Corinthian Colleges and ITT, badly damaging investor sentiment towards the space.

But with Donald Trump about to enter the White House, the regulatory environment for the for-profit universities should indeed radically improve, and their stocks should boom as their regulatory and legal headwinds ease tremendously. Investors can profit from this trend by buying the shares of the for-profit education companies that survived the Obama years, including Apollo, Bridgepoint, and American Public Education.

There is a great deal of evidence which indicates that the Trump Administration will be far kinder to for-profit education companies than its predecessor was. First and foremost, most investors do not realize the extent to which campaign contributions foreshadows policy. For example, President Obama received over $25,000,000 from employees of the education sector, which includes non-profit colleges, in 2008. And Obama received more money from University of California employees than from employees of any other organization in 2008, and Harvard University was his third most prolific source of funds, while Stanford and Columbia came in at number 11 and 13, respectively. So, given that for-profit colleges compete with non-profit colleges for finite and increasingly scarce U.S. government funds, it's not surprising that the Obama administration proceeded to hamstring the ability of for-profit colleges to obtain those funds.

The picture could not be more different for Donald Trump's campaign. Non-profit colleges gave very little money to Republicans in 2016, and employees of Education organizations gave him just $629,000, with the sector ranking as the 15th highest sources of funding for the candidate. Additionally, three of the four for-profit education companies that were the most generous campaign contributors in the sector last year gave the lion's share of their money to conservative/Republican candidates and groups.

There are other reasons why the Trump administration will probably be much more friendly to the for-profit education sector than the Obama administration was. As the Washington Post noted, he has said that the powers of the Department of Education should be curtailed, and he has even suggested that the department should be closed down completely. Furthermore, regulators cracked down on Trump's own for-profit institute of higher learning, Trump University. That experience will probably make Trump very sympathetic to the pleas by the for-profit education companies regarding excessive regulations. Finally, the president-elect in general is a strong supporter of private enterprise and government vouchers that can be used to pay tuition at private schools. Based on those positions, it would be logical to conclude that Trump, at least to some extent, would be interested in helping for-profit companies that operate universities.

Finally, the president-elect's nominee for Education Secretary, Betsy DeVos, has for many years been a tremendous backer of vouchers that can be used to pay tuition at for-profit private schools. As a result, like Trump, she is highly likely to support companies that run for-profit universities. After all, they are, like the companies that DeVos has backed so strongly, for-profit education institutions.

Based on the president-elect's campaign contributions, his own philosophy, and that of his nominee for education secretary, there is little doubt that his administration will make life much easier for for-profit education companies. As the Trump administration eases the regulatory and legal headwinds facing the sector, for-profit education stocks will rebound tremendously. Investors should enter the sector now before the change becomes much more apparent.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Additional disclosure: Mike Taylor told me he wanted to look at this column.