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ESI And CECO: For Profit Education Stocks May Be Value Seekers' Goldmine

|Includes: CECO, COCO, ITT Educational Services Inc. (ESI)

For profit education stocks continue to trend lower on concerns among investors stemming from adverse regulatory actions. While ITT Educational Services (NYSE: ESI) is subject to an ongoing investigation from the U.S. Consumer Financial Protection Bureau (CFPB), Career Education Corp (NASDAQ: CECO) saw a big drop in stock price in May after posting wider than expected quarterly losses. Another industry player Corinthian Colleges (NASDAQ: COCO) recently announced to sell its underperforming schools - an indication of just how serious market regulators have become on the issue. The sharp cuts in these stocks also make them ripe for bottom fishing. Here is a quick look to see if this is truly a case of diamonds in the rough or that of falling knives.

ITT Educational Services has lost nearly 40 percent value in the last three months, on top of the 20 percent cut it saw in the first quarter of the year. In its bid to tackle the private student loan industry, the CFPB is probing to see if ITT violated laws in the marketing of private student loans. This factor has contributed most to the massive drop in ITT's stock price. Meanwhile, the business has suffered amid declining student enrollments. During the latest quarter, new student enrollment declined 3.8 percent while total student enrollment dropped 6.4 percent. For the year ended December 2013, the company's revenue suffered 16.9 percent, but profitability took a harsher beating, declining 57 percent. Among the few positives at the moment is its debt free status of the balance sheet.

ITT gets significant federal funding and if the logjam continues, it is ITT which will be at the receiving end. The stock looks very attractive at a price earnings ratio of just 6.3, but it is still not in compliance with the government's directive to account for its student loan liability properly. Without doubt, the upside is huge if ITT comes out unscathed, but the stock is essentially for brave hearts.

On the other hand, Career Education Corp - one of the largest for-profit education companies - isn't embroiled in a regulatory maze, but continues to reel under pressure amid a slowing industry. The company has posted losses for the last couple of years, marking a trend that continued in the latest quarter as well. In terms of financials, there is not much to talk about except that the rate of top line decline moderated in the latest quarter.

One can also find solace in the fact that the company has a debt free balance sheet which should help it in sailing through these turbulent times. The company is a major player and can be expected to bounce back strongly once the new rules are finalized. The stock currently trades at a 19 percent discount to its book value and roughly equal to the net cash of $4.5 per share. Businesses selling close to cash value without debt on their balance sheets is the ultimate, and one of the most difficult situations a value investor can hope for. At the same time, the company isn't entangled in legal tussles with the government and the management continues to work on the turnaround plan. This makes it not just an excellent value play, but also a potential takeover target.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.