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With Education Stocks, Indirect Investment Is Better

The best way to play the education sector is not the most obvious ... so choose wisely

The most obvious way to invest in the education sector is with for-profit colleges and universities, as many such education stocks are publicly traded.

With Education Stocks, Indirect Investment Is Better (TWOU)

But the most obvious way isn’t always the best way — and that has actually been quite obvious so far this year.

Declining enrollment and regulatory crackdowns have weighed heavily on for-profit education stocks. Strayer Education (STRA) and DeVry (DV) each increased dramatically in 2014, but STRA stock has lost around 23% year-to-date, while DV stock has lost over 40% during the same time period.

Capella Education (CPLA) has sunk 33% since the start of January, while Apollo Education Group (APOL) has tallied losses twice as wide. Not to be left out, ITT Educational Services (ESI) has also suffered a nearly 70% decline in 2015.

And Corinthian Colleges (COCOQ) is now worth barely over a penny, while it traded for close to $20 back in 2010.

You get the point.

That’s not all, though. Just a couple weeks ago, The Brookings Institution added insult to injury when it released a report showing that for-profit schools are accountable for a widely disproportionate share of student loan debt and defaults.

Add it all up, and it’s crystal clear that the for-profit sector isn’t worth your time. The headwinds that have caused just about all stocks in that education sector to take a beating aren’t going anywhere, so don’t be fooled into bottom-fishing.

Playing it Smart in Education Stocks

That’s not to say that there’s no value in education, though — the key is to simply find strong companies that are more indirect bets on the market.

One example of a company that allows education-sector exposure without betting on a battered for-profit stock is 2U Inc. (TWOU), which went public last year and provides cloud-based software-as-a-service (SaaS) solutions for nonprofit colleges and universities.

Unfortunately, deeper digging into TWOU stock shows that it has some red flags of its own.

Sure, shares were up more than 5% Friday after the company announced a $34 price tag for its upcoming offering of common stock. And the pick has momentum to say the least, as it has soared over 125% in the last year, including almost 80% gains for 2015. Plus, the cloud mega-trend is nice and sales growth is substantial at around 30% annually.

The trouble comes with the fact that the company has yet to post positive annual profits or cash flows. And while the negative operating cash flows have been shrinking year-over-year, the net losses have actually gotten wider.

I would keep an eye on TWOU stock going forward, especially with regards to profitability, before I made a bet. Still, despite the red flags, the company’s business model is a prime example of the fact that indirect educational investments are available.

Bottom Line

So while for-profit stocks are struggling, that’s not to say that there aren’t any good ways to play the education sector.

The lesson is that the best picks are indirect ones in this instance, as opposed to straight for-profit universities. And even with indirect education investments, you have to be sure to do your legwork.

An industry mega-trend alone isn’t enough to justify a buy in the education sector.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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