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For-Profit Colleges Are Doomed

College educations may be the next bubble

   

I have to offer a mea culpa on this sector.

At one time, I loved it. The idea that students didn’t have to go to a college or university and could instead choose a post-secondary education at schools that provided more practical training and study sounds great in principle.

Even better, people could finance their educations using a host of government loans and grants. The companies in this sector were thus being provided revenue by the deepest pockets any company could want — the government!

But things have changed. The Department of Education has cracked down on recruiting practices. There have been charges that these schools don’t really provide such great training.

The real threat to the sector, however, is that college educations may be the next big bubble.

I think of it as I do the housing bubble. People started leveraging themselves up on super-cheap and easy credit, then bought a house that they just knew could be flipped for a profit. That worked just fine — until the music stopped. Then home prices started to fall and the bubble popped.

Americans have long been sold the concept of leveraging super-cheap and easy credit to buy a college education, just knowing that afterward, they could flip it for a job!

One look at the faces of this month’s college graduates will tell you they aren’t so sure about that prospect anymore, are they?

With real unemployment at nearly 15%, job prospects are worse than they’ve ever been. So the ROI of a college education will continue to fall because colleges continue to raise tuition at rates that exceed inflation.

Sooner rather than later, people are going to realize this. It may happen at traditional colleges first and then at for-profits or vice-versa. In any event, enrollment will start to decline. We’ve already been seeing this for several quarters at the for-profits.

As enrollment falls, so will tuition. The legacy costs at traditional colleges cannot be cut, and for-profits will have to cut costs to maintain profitability, which they won’t be able to do at the same pace as enrollment declines. The entire post-secondary system will collapse.

Thus, I would look to either short the entire sector or buy long-term puts.

Some of the companies to look at for this include Apollo (NASDAQ:APOL), Strayer Education (NASDAQ:STRA), DeVry (NYSE:DV), Career Education Corp (NASDAQ:CECO), Education Management Corp (NASDAQ:EDMC), ITT Educational Services (NYSE:ESI) and The Washington Post Company (NYSE:WPO), which owns Kaplan and is also in the crappy business of newspapers to boot.

There’s one possible saving grace. Ron Baron, one of the great mutual fund managers and a for-profit school maven who has held DeVry stock for many, many years, has not sold out. It’s hard to bet against Mr. Baron, so at least with DeVry, you may want to just avoid the stock or even buy in if you think this venerable player can survive.

Lawrence Meyers does not have a position in any security mentioned.


Article printed from InvestorPlace Media, http://investorplace.com/2012/06/for-profit-colleges-are-doomed/.

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