Last week the Federal Reserve announced that consumer credit rose for the fourth consecutive month—this time, by $16 billion. This was more than double the median forecast, which called for an $8 billion hike in consumer credit. And the bulk of the increase — $15.2 billion — was thanks to a surge in non-revolving debt, especially student loans.
With so much money flowing into higher education, could there be a buying opportunity here? To answer this question let’s take a look at some of the nation’s largest for-profit higher education companies. We’ve all seen the commercials from Strayer (NASDAQ:STRA), DeVry (NYSE:DV) and Apollo (NASDAQ:APOL)—which runs the University of Phoenix.
These companies typically cater to nontraditional students looking to boost their career prospects. According to the Department of Education, a staggering 93% of students attending for-profit schools take on debt to finance their education, with the average loan totaling over $17,000.
And while the jury is still out on whether for-profit institutions truly address some of the market failures left by conventional public and private non-profits, when it comes to my Portfolio Grader system, these schools don’t make the grade:
- Apollo Group has hit rock bottom in terms of sales and earnings growth and buying pressure has grind to a halt. Analysts expect sales to drop 13.7% this quarter and earnings to plunge 56.9%. APOL is an F-rated sell.
- DeVry is a similar story, with the consensus calling for a 39.1% drop in earnings this quarter. Despite its history of beating earnings estimates, institutional investors won’t touch this stock, and that’s thanks to its poor operating margins. DV is a D-rated sell.
- Strayer also strikes out on buying pressure, as shown by its F-rated Quantitative Grade. Because its sales and earnings prospects are so terrible, not even its 7% dividend yield could entice me to buy. STRA is a D-rated sell.
One reason that these institutions may be struggling is because so many of their students default on their loans. For a number of reasons, for-profit schools account for nearly half of all federal loan defaults. This has drawn the scrutiny of several federal agencies, so for-profits will likely see more rules imposed on them to help reduce the default rate. So while the for-profit education model may be a tempting one for investors, I recommend that you stay away.