After investors stopped panic-selling in March, their attention turned to what the ‘new normal’ was going to look like. Industries would change, as would consumer behavior. And so during the market’s recovery, investors have focused on potential winners in key sectors. Education stocks are no exception.
Indeed, investor preferences in the sector mirror those of the market as a whole. More innovative, and more flexible (usually tech) companies have prospered. Older, more stagnant names have struggled. Among education stocks, the trend has been even more pronounced.
One of the sector’s biggest winners in 2020 has been GSX Techedu (NYSE:GSX), a purveyor of online education services in China. GSX stock has rallied more than 161% so far this year. Two smaller Chinese peers have done even better, while larger rival TAL Education (NYSE:TAL) has gained a healthy 40%.
Legacy publisher Houghton Mifflin Harcourt (NASDAQ:HMHC) has probably been the worst stock in the industry, losing two-thirds of its value. Graham Holdings (NYSE:GHC), owner of Kaplan test prep, has been nearly halved.
Those divergent returns make some sense. Investors would do well to keep them in mind going forward as well. What look like the three best education stocks to own right now have been 2020 winners, but should have more upside ahead.
It’s worth noting upfront the concern with CHGG stock: valuation. Chegg shares trade at 51x next year’s consensus earnings per share estimate. They’ve rallied 76% so far this year, including a 32% jump after a blowout first quarter report last month.
But this is not a stock that should be cheap. The company is absolutely dominant in online student services. As chief executive officer Dan Rosensweig put it years ago, online services tend to be “winner take most” markets. Chegg is the unquestioned winner.
And as the company adds new offerings, moves overseas, and targets students beyond its core college population, its market will only expand. So while CHGG stock seems expensive, there’s a long runway for growth.
On this site Luke Lango argued after earnings that shares had a path to hit $200 in five years, albeit in close to a best-case scenario. Given that this year’s rally leaves Chegg stock just shy of $70, there’s a strong case that the rally is much closer to the beginning than to the end.
Lincoln Education Services (LINC)
For-profit education stocks like LINC have been hit-or-miss investments this decade. Grand Canyon (NASDAQ:LOPE) and Strategic Education (NASDAQ:STRA) have been winners. But Zovio (NASDAQ:ZVO), formerly Bridgepoint Education, has collapsed. Apollo Education sold itself to private-equity shop Apollo Global (NYSE:APO) at a sharp discount to past highs.
LINC stock has mostly struggled: shares have traded under $5 since late 2013. A strengthening economy has proven a headwind, as a tight job market attracts potential students.
But the impact of the current pandemic suggests a larger base of customers in the near- to mid-term. Meanwhile, Lincoln itself posted a strong first quarter report in May, with revenue up more than 10% year-over-year.
LINC has rallied to a six-year high, but here too there’s a case for more upside. Valuation is reasonable, at about 13x forward earnings. Demand in markets like healthcare and skilled trades should stay solid going forward. Below $4, LINC stock looks too cheap.
2U works with nonprofit universities to provide online graduate degrees, while also offering credentials and “boot camp” classes. Unsurprisingly, TWOU has become a pandemic play: shares have more than tripled from March lows.
But the rally may not be over. A price to revenue multiple under 4x is conservative for a platform play, even if the company remains unprofitable. The growth opportunity is massive, particularly as 2U ramps up its operations worldwide.
And this is a stock that traded over $90 in 2018. That doesn’t mean TWOU necessarily will return to those levels, but we’ve seen what kind of valuation investors will bake in when sentiment is positive. After a crisis that may well lead to significant, long-term changes in higher education, that sentiment at the least is improving. If it continues to do, 2U stock likely continues to rally.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.