ITT Educational Services
The for-profit education sector has been hit hard by tighter standards for student loans, negatively impacting enrollment. Stocks in the sector are down significantly from prior highs, and short sellers have pounced, looking for further losses. ITT Educational Services (NYSE:ESI) had 9.44 million shares short at the end of September.
Shares of ITT Educational Services are down about 37% since selling in the market began in July. That seems fairly excessive considering that for-profit education should see a boost in enrollment if the economy slips into recession — when unemployment is high, those serious about getting a job get serious about improving their resume through education.
All of the selling in ITT has made ESI stock very cheap relative to expected profits. At current prices, the stock trades for just six times current-year estimated earnings and eight times next year’s estimates for profits. Whatever froth existed in this stock is no more. To the extent the company can impress Thursday, look for short sellers to run for the hills.
Life Time Fitness
If the economy does indeed recede, look for consumers to curb spending on discretionary items. Health club memberships might be vulnerable as a result. That appears to be the concern of those now selling short Life Time Fitness (NYSE:LTM). As of the end of September, 25% of Life Time’s float was held short.
The bear case makes sense, but not if earnings continue to impress. The company has matched or exceeded estimates in the past two quarters. For the period ending Sept. 30, Wall Street estimates have increased by only a penny per share. For the full year, the company is expected to report a profit of $2.31 per share, growing 16% to $2.69 per share in 2012. At current prices, LTM trades for 17.5 times current-year estimated earnings.
While it is reasonable to think health club spending will slip during a recession, Life Time should continue to benefit from more individuals adopting healthy lifestyles. The desire to extend lifespan could outweigh the potential for less spending in this space. Consumers are likely to cut elsewhere.
We will find out when the company reports results Thursday. If guidance is reaffirmed or increased, the short case could get buried, and a squeeze-powered stock rally would ensue.
As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks. Get a free copy of his five keys to trading earnings here.