Financier Baron Rothschild famously said, “The time to buy is when there’s blood in the streets.” What he meant is that the largest profits are made when traders purchase shares in companies whose share price has been beaten down so far that most investors have lost all interest. It’s at this point that spectacular turnarounds can happen.
Today, one industry in particular has come under fire. Extreme regulatory pressure, public outcry, massive defaults, and even having its financial lifeline threatened have caused investors to flee the sector in droves.
Stock prices in this sector plunged to lows last July. Then, before prices recovered, investors quietly starting snapping up shares again. These brave investors have since been rewarded handsomely with monster gains. The leading names in the sector have been trading higher by over 30% year-to-date, and I expect much greater gains over the next several years. That sector? For-profit education.
Regulatory Pressure Has Crushed Profitability
The for-profit education sector is a $23 billion industry with over 1,000 active businesses. Recently, for-profit universities and colleges have increasingly come under fire for their marketing tactics and admissions standards. The industry suffers from a shockingly high level of student loan defaults and student drop-outs.
In fact, the U.S. Department of Education has received over 8,000 requests for loan forgiveness due to fraud. A combination of average tuition of $35,000 annually combined with easy to access, government-backed student loans has led to this difficult situation.
Things had gotten so bad for the sector that, in early 2016, the Obama administration formed the Student Aid Enforcement Unit within the Department of Education. The Wall Street Journal reports that the unit will be given a broad mandate to investigate claims of “potential misconduct or high-risk activity” against a college or university.
Together with the new gainful employment and borrow-defense regulations, this painted a bleak picture for the sector.
The gainful employment rule is an effort to reduce graduate unemployment. It requires that, in order to qualify for federal student aid, educational programs must “prepare students for gainful employment in a recognized occupation.”
On the other end, the borrower defense regulation protects students by giving them the ability to discharge student loans that were used for a fraudulent educational program.
Even more dire for these universities is that these regulations are written in broad language, leaving them open to interpretation and assault by aggressive lawyers.
Now The Good News
The smallest chance of a Trump win was enough to launch the sector higher in July. Now that he’s won, the Trump administration is expected to enforce these laws lightly or remove them altogether.
But the industry will need to make its own changes as well. The false advertising and employment promises will need to stop if they hope to regain government support.
However, I firmly think the sector has tremendous upside from current prices. Most of the changes expected to be made will work to better the entire industry for the long term.
One stock that stands to benefit from these developments is DeVry Education Group Inc (DV).
DeVry is a $1.8 billion-market-cap global provider of educational services. They are the parent organization of many other educational entities, including American University of the Caribbean School of
Medicine, Becker Professional Education, DeVry Brasil, Ross University School of Medicine, and Ross University School of Veterinary Medicine. These institutions offer a wide array of programs in healthcare, business, technology, accounting, finance, and law.
Aside from the likely regulatory improvements, several bullish catalysts are powering DeVry higher. Just recently, the company’s veterinarian medicine school, Ross University, signed a memorandum of understanding with the highly respected John Hopkins Bloomberg School of Public Health to explore joint research and educational opportunities between the schools. Talk about a huge plus for public perception of DeVry!
Next, the company reported an excellent first quarter of fiscal 2017. Total revenue was higher by nearly 2%, medical and healthcare revenue added nearly 6%, and international education revenue grew by close to 60%. Net income ramped higher to just over $25 million compared to roughly $5 million at the same time last year. Also, showing a bullish bias, the company repurchased over 370,000 shares in the first quarter.
Lisa Wardell, president and CEO of DeVry Education Group, expressed the company’s desire to create value by addressing workforce skill gaps in the global job market. To that end, she said, “We are launching a range of shorter, stackable courses and strengthening our professional licensing exam preparation programs, all designed to provide students with the right training in the most accessible manner.”
She also added that DeVry will be making efforts in the coming years to reduce reliance on federal funding.
Risks To Consider: Donald Trump may not be able to change for-profit education regulations as quickly as many investors believe. We may see a pull back from the current uptrend before the next move higher in price.
Action To Take: I love the way DeVry is improving across the board and has plans to deal with coming changes. Enter long on an upside break of $30.00 per share with a $44.00 per share target price. Initial stops are suggested at $24.73 per share.
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