Your parents and teachers always said you’d make more money if you put more into education. Were they right? Possibly — as long as they weren’t talking about for-profit education stocks. If the bubble for this sector hasn’t already burst, it’s at least greatly deflated.
Unemployed and underemployed workers flocked to for-profit schools during the recession, prompted by the dream that online, convenient degree programs would get them new — and higher-paying — jobs. Then came the wakeup call: many students found that the fancy piece of paper on the wall didn’t come with an actual job attached.
Many schools had aggressively recruited new students — including some without high-school diplomas or who otherwise didn’t meet traditional admissions criteria. As a result, dropout rates were higher and the still-unemployed former students were saddled with high debt loads. Predictably, loan default rates on federal loans made to students at for-profit schools soared.
To make matters worse, the U.S. Department of Education’s inspector general has identified a growing loan-fraud problem: loosely organized groups of “students” are enrolling in online programs to take the money and run. Since online schools can’t verify identity, they soon might be forced to implement costly new monitoring requirements.
With increased scrutiny from federal and state regulators, and new enrollments slipping, it’s no wonder that stocks that were shining back in June are starting to look tarnished today.
While some for-profit schools will survive — and prosper — here are four stocks in the for-profit education sector that may be circling the drain now:
1. Career Education Corp. (NASDAQ:CECO). In the wake of federal and state probes into its practices and the resignation of CEO Gary McCullough, CECO has lost nearly half its value this month. At $7.89, the stock is trading more than 71% below its 52-week high of $27.60 in June. With a market cap of $586 million, CECO has a price-to-earnings growth (PEG) ratio of 3.1, suggesting the stock is very overvalued. Its one-year return is negative 59%.
2. Education Management Corp. (NASDAQ:EDMC). The second largest for-profit college is defending a multibillion-dollar fraud lawsuit brought by four states and the Justice Department. At $21.32, the stock is trading 25% below its 52-week high of $28.61 in July. With a market cap of nearly $2.7 billion, EDMC has a PEG ratio of 1, indicating it’s fairly valued. Its one-year return is 49%.
3. ITT Education Services (NYSE:ESI). ITT last month reported a 28% drop in its third-quarter earnings as higher costs pushed its operating margin down a whopping 7.3% to 30.5%. At $57.50, ESI is trading nearly 40% below its 52-week high of $95.52 in July. With a market cap of $1.5 billion, the stock has a PEG ratio of 0.8, indicating the stock may be undervalued. Its one-year return is nearly negative 9%.
4. DeVry (NYSE:DV). Although DeVry’s fourth-quarter revenue grew by 8% year over year, its summer enrollments fell by more than 25%. At $36.95, DV is trading almost 45% below its 52-week high of $$66.85 in July. With a market cap of $2.4 billion, the stock has a PEG ratio of 0.8, suggesting the stock is undervalued. Its one-year return is negative 20%.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
