For-Profit Education Stocks: Uncle Sam Neutered by Industry’s Lobbying Blitz

We hate to say we told you so: Beginning with a YCharts column on September 22, 2010, entitled, “For-Profit Colleges: Don’t Bet on Uncle Sam Being Too Tough,” we’ve opined that the U.S. government might not have the, uh, stones to actually make good on its promise to clamp down on for-profit education companies.

The conclusion then: the stocks – which had plunged on the news of allegedly shady practices; on proposed tougher rules on government loans and grants that supply most of the industry’s revenue; and also been beaten down by short sellers -- were probably oversold.

An article in Saturday’s New York Times seems to confirm our thesis, and to offer yet again a lesson in how our government actually works. In essence, the for-profit industry went out and hired a bunch of Washington insiders, including one former top Obama aide, and began complaining that they were being picked on. The Education Department backed off, and the resulting rules won’t pack nearly the wallop once expected.

The Times piece ran just a few weeks after the government’s General Accountability Office had released yet another study finding troubling practices at for-profit schools. Fictitious high school diplomas, for instance, were enough to gain admittance at 12 of 15 schools, the GAO found. And some schools exhibited a disturbing tolerance of plagiarism and of failure to complete assignments.

Would this latest investigative broadside put some backbone back into the Education Department? Highly unlikely. Attention spans run short in Washington, and both the Obama Administration and Congress seem pretty busy making sure other crucial tasks go uncompleted.

The drama around for-profit education stocks has been fascinating, and YCharts has returned to the topic repeatedly (here and here and here and here) because it so nicely illustrates an important investment principle: don’t bet your money on the government doing something. Those who bankrolled the hazardous waste industry in the 1980s, awaiting sweeping edicts from Washington to incinerate vast amounts of toxic dirt, ended up poorer for the effort, and most of the dirt hasn’t moved.

The for-profit stocks got collectively hammered in the early part of last year’s second quarter, and have bounced around since then.

Apollo Group Stock Chart

Apollo Group Stock Chart by YCharts

Strayer Education Stock Chart

Strayer Education Stock Chart by YCharts

That has produced some super-low PEs, as profits have mostly held up well so far.

Apollo Group PE Ratio Chart

Apollo Group PE Ratio Chart by YCharts

Strayer Education PE Ratio Chart

Strayer Education PE Ratio Chart by YCharts

The industry won’t have free rein going forward. But it’s likely some of them will be able to continue growing nicely and reporting strong profits. If the mildly-increased federal oversight chases a few of the baddest actors out of the industry, that will only help those that remain.

Jeff Bailey is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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