Most Popular Stock Among Biggest Hedge Funds in 3Q? Go Figure
The kind way to describe for-profit college DeVry’s (DV) recent earnings report is: “less bad than expected.” A more exact description includes a 41% profit slide and a 7% revenue fall due to declining enrollment. But that sort of focus disguises the fact that a whole lot of investors – including some very wealthy stock pickers – are quite bullish on DeVry these days.
DeVry shares actually jumped 25% on the Oct. 25 earnings report, pushing the company onto the most actively traded and biggest gainer lists for awhile. It was a particularly impressive feat considering the fate of its competitors following their own announcements.
The hedge fund world must have seen this coming. DeVry was the most popular buy in the third quarter among managers of the 50 largest hedge funds, according to datarama. Among them were John Rogers of Ariel Appreciation and Charles Brobrinskoy of Ariel Focus. Their investments followed a big second quarter DeVry entry by FPA Capital’s Robert Rodriguez, a deep value investor who also added to his holdings in the last quarter.
The attraction? DeVry is looking like the best turnaround candidate in an industry that just survived a life-threatening attack. For-profit colleges offering largely two-year vocational degrees (although some do graduate school, too) get some 90% of revenues from federal student loans and grants, and loans to such institutions have particularly high default rates. Legislation -- aimed largely at curbing $35,000 bills for training that leads, for the lucky, to $15,000 a year jobs – sought to limit aggressive recruiting and to tie funding to job-placement rates.
The year ended with Armageddon averted; a massive lobbying campaign by the industry helped water down regulations. But the bad publicity and the general frustration for job seekers, even with degrees, these days has hurt resuts throughout the industry. Apollo Group Inc. (APOL), the largest U.S. for-profit college and owner of University of Phoenix, announced in mid-October plans to close half of its locations. ITT Educational Services (ESI) reported a whopping 17% year-over-year enrollment decline.
It’s this sort of environment that makes DeVry look good even as its numbers remain bad. DeVry’s enrollment loss wasn’t as much as analysts had expected and was less than competitors’. Although overall enrollment was down, enrollment and profits were significantly up at its smaller medical and healthcare campuses. Investors see growth there. Perhaps more importantly for now, though, they were impressed by bigger-than-expected cost cuts that made DeVry’s earnings per share figures better than expected, and plans to significantly cut costs further.
Meanwhile, the bullishness on DeVry has caused its share valuations, based on PE ratio, to more than double over competitors.
No one expects a great year for DeVry in 2013. In the analyst world, DeVry shares carry a mixed lot of recommendations. Considering 21% of its float is currently held short, someone thinks this latest boon will be short-lived. But perhaps all those hedge funds are onto something.
Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.