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For-Profit Colleges Are Beating The Curve

31 October 2013 in Trading Ideas

As far as investors are concerned, the for-profit education sector has gone from Class Clown to the equivalent of Big Man On Campus.

Our For-Profit Colleges motif has surged 12.0% over the past month; during that same timeframe, the S&P 500 is up 3.8%.

So far in 2013, the motif has risen 32.2%; the S&P 500 has gained 22.2%.

The resurgence by for-profit higher education providers over the past year is a stark contrast to where the industry stood just a year ago. Then, investors were heading for the exits as companies that had once reported double-digit increases in enrollments and hundreds of millions of dollars in profits were now seeing plunging enrollments.

In addition, one of the sector’s leading lights, Apollo Group (which has a 9% weighting in the For-Profit Colleges motif) said almost exactly one year ago that it was planning to close half of its brick-and-mortar locations.1

for-profit colleges motifNot so ironically, perhaps, it was the cost-cutting by Apollo, which operates the well-known University of Phoenix program, that has proven to be a key factor in the recent runup in stocks of higher-education providers. Last week, the company’s shares rose to their highest in a year, after the company said it reported a fourth-quarter profit that was twice the market estimate – and intended to cut more costs in 2014.2

Just as promising, the company’s effort to freeze tuition fees to attract students has shown evidence of starting to deliver.

The company reported a 22% drop in new enrollments in the fourth quarter, compared with a 24% fall in the preceding quarter. While still evidence that enrollments are, as a whole, moving in the wrong direction, this is the first time in more than a year that it has said the decline in sign-ups is slowing.

Apollo said the decline in sign-ups could slow further in the current quarter.

That appeared to be more than enough for investors, who bid up Apollo shares 30% just last week alone. In addition, Apollo’s boat lifted the tides of Strayer Education shares, which gained 15% last week, and DeVry, which added 12%.3

The key longer-term enrollment question hasn’t necessarily been answered, but in an investing environment that has largely favored stocks for four-and-a-half years, investors may see little downside to setting the bar extremely low.

1Melissa Korn, “For-Profit Colleges Get Schooled,” WSJ.com, Oct. 24, 2012.

2Sagarika Jaisinghani, “Outlook for education stocks brightens after Apollo’s results,” reuters.com, Oct. 23, 2013, http://www.reuters.com/article/2013/10/23/us-apollogroup-results-idUSBRE99M10G20131023, (accessed Oct. 30, 2013).

3Alan R. Elliott, “Five Education Stocks Are Climbing Hard In October,” Investor’s Business Daily, Oct. 29, 2013, http://www.reuters.com/article/2013/10/23/us-apollogroup-results-idUSBRE99M10G20131023.