The pandemic has brought challenges to education. While the day-to-day world of academic life has turned on its head, several companies have not only adjusted to the “new normal,” but innovated to benefit from these new realities. Therefore today we’ll look at seven education stocks to buy that may be of interest to InvestorPlace readers.
There are potential long-term economic impacts from social distancing and other ongoing coronavirus-driven changes. Laura Gonzalez, Ph.D., associate professor of finance at California State University, Long Beach explains :
Employees are enjoying virtual meetings, which is a savings in work-travel expenses for corporations. Does that mean that the hotel, airline and car rental industries are bound to lose? Not necessarily. Online education for example is experiencing a growth that will lead to a richer tool box, and higher quality additional options going forward. Institutions and firms that understand the new normal and embrace the new opportunities will do well.
According to Professor Gonzalez, “… in general, we now understand better why digital connection offers valuable alternatives but have limitations. Technology cannot replace human where humanity is an essential component, but its presence in health care, education, food services, finance etc. is bound to continue growing.”
Many public and private educational institutions are regarding the pandemic as an opportunity to become more technologically-driven and productive. Meanwhile, online learning has become a buzzword. Obviously, going digital involves a lot more than just “online-ing” brick-and-mortar classes.
Educators and businesses alike appreciate the challenges ahead as well as the potential for innovation. Stakeholders will need to pay attention to the vital relationship between technology, teacher, students as well as parents or guardians. With that background, here are seven education stocks to buy:
- Arco Platform (NASDAQ:ARCE)
- Bright Horizons Family Solutions (NYSE:BFAM)
- Chegg (NASDAQ:CHGG)
- Global X Education ETF (NASDAQ:EDUT)
- K12 Inc. (NYSE:LRN)
- New Oriental Education & Technology Group (NYSE:EDU)
- TAL Education Group (NYSE:TAL)
Education Stocks to Buy: Arco Platform (ARCE)
52-Week range: $29.09 – $59.49
Brazil-based Arco Platform Limited provides technology-enabled features to deliver educational content to Brazilian schools. Arco’s curriculum is targeted towards K-12 grade levels. It serves more than 1,360,000 students and 5,400 private schools throughout the country. The company delivers its core curriculum content four times each year, in March, June, August and December, and its supplemental solutions content twice each year, in June and December. Therefore, there is seasonality in its revenue recognition.
Arco Platform was founded in 2004. It finalized its Initial Public Offering (IPO) on Sept. 25, 2018 at $17.50 per share and began trading on the Nasdaq Exchange the next day.
In mid-August, the group announced mixed Q2 results. Net Revenue of 234.9 R$ million compared to 261.6 R$ million in Q1. Net Profit was 16.2 R$ million, compared to 3.8 R$ million a quarter ago.
So far in the year, the shares are down close to 10%. With double digits growth rates in an emerging country, ARCE stock is a growth stock with a high risk/high return profile. Potential investors may find better value in international education stocks like ARCE around $35.
Bright Horizons Family Solutions (BFAM)
52-Week Range: $64.23 – $176.98
Watertown, Massachusetts-based Bright Horizons Family Solutions offers child care and early education services as well as back-up care services, educational advisory services, and a range of workplace solutions both for employers and families. It has over 1,076 child care and early education centers in the U.S., Puerto Rico, the United Kingdom, Canada, the Netherlands, and India.
In early August, the company announced subdued Q2 results that raised eyebrows. Revenue of $294 million meant a YoY decrease of 44%. Income from operations was $8 million, showing a decrease of 89%. Finally, net income of $0.4 million and diluted earnings per common share of 1 cent, meant decreases of 99%, respectively.
CEO Stephen Kramer called the quarter “one of the most challenging in the company’s history.” Lockdowns have forced the company to close many of its centers for at least several weeks.
Management noted, “As of June 30, 2020, over 400 of our child care centers were operating, out of a total of 1,076 centers we manage… We plan to continue this phased re-opening through the third and fourth quarters of 2020, and potentially in subsequent periods, and expect to have more than 85% of our centers open by September 30, 2020. However, as this is a continuously changing environment, the timing and cadence of re-opening the remaining temporarily closed centers may change.”
The company may face continuing uncertainties in the weeks ahead. Year-to-date (YTD), BFAM stock is down about 0.9%. Long-term investors may want to keep the company on their shopping list of education stocks to buy. We’d look to buy around $125.
52-Week Range: $25.89 – $89.82
Chegg started life as a textbook provider to college students. Now it operates a direct-to-student learning platform. Chegg Services includes digital products and required materials such as print and eTextbooks. Its digital products and services include Chegg Study, Chegg Writing and Chegg Tutors. Put another way, the offerings range from study aids to live tutors. In addition to North America, it is also growing in the U.K. and other English-speaking countries.
Analysts were pleased with the second-quarter results announced in August, which topped estimates. Revenue was $153 million, an increase of 63% YoY. It now has 3.7 million Chegg Services subscribers, representing an increase of 67% YoY.
CEO Dan Rosensweig was pleased with the results and said “we had more subscribers in Q2 of this year than we had in all of 2018.” The company also offered strong guidance for the rest of the year.
Since the start of the year, CHGG stock is up almost 90%. A decline toward the $65-level or below would improve the margin of safety.
Global X Education ETF (EDUT)
52-Week Range: $14.51 – $17.25
Expense Ratio: 0.50%
Our next choice is an exchange-traded fund (ETF). Education is fast evolving from students physically going to a classroom with teachers in-person. Therefore, many of the stocks we’re introducing today are likely to stay around and grow in the coming years. Now, there is also a new thematic fund that may pique the interest of market participants.
The Global X Education ETF provides exposure to education stocks that facilitate education, including online learning and publishing educational content, as well as those involved in early childhood education, higher education and professional education.
EDUT, which has 36 holdings, tracks the Indxx Global Education Thematic Index. GSX Techedu (NYSE:GSX), Zoom Video (NASDAQ:ZM), and TAL Education Group top the list of holdings.
The top 10 holdings comprise close to 70% of EDUT’s total net assets, which stand around $5.7 million. As the fund was launched in July 2020, it is still a young fund with little trading history. Therefore, potential investors may want to keep it on their radar screen for now and wait to buy the dips. EDUT is likely to go below $15 in the coming weeks.
K12 Inc. (LRN)
52-Week range: $15.06 – $52.84
Herndon, Virginia-based K12 Inc. provides proprietary and third-party online curriculum, software systems, and educational services. Like ARCO Platform, its focus is also on K-12 students. The company, which was founded in 2000, offers online and blended education solutions, curriculum, and programs. For example, Miami-Dade school district uses its platform. Educators can quite easily customize the online curriculum provided by the company.
Earlier in the summer, the group released robust Q2 results. Revenues of $1.04 billion, compared to $1.02 billion YoY. The growth was thanks to increased enrollments as well as the acquisition of coding boot camp Galvanize in January 2020. Excluding the impacts from the acquisition of Galvanize, revenues would have been $1.03 billion.
Diluted net income per share of came at 60 cents, compared to 91 cents YoY. Excluding the impact from the acquisition of Galvanize, diluted net income per share would have been 94 cents. Its managed public schools program accounts for over 85% of its revenue.
CEO Nate Davis noted “As we approach the new school year, we’re preparing for increased student enrollments by hiring more teachers and expanding our learning platform. Managed public school enrollments are already 150 thousand, as of August 7, and we are entering what has historically been the busiest part of our enrollment season. We are therefore positioned to deliver double-digit growth in both revenue and adjusted operating income in the coming year.”
LRN stock is up over 30% YTD. We’d be buyers if there is a decline toward the $25-level or below.
New Oriental Education & Technology Group (EDU)
52-Week Range: $102.01 – $157.15
New Oriental Education & Technology Group takes us to China, the most populous country on earth. Behind the U.S., it is also the second largest economy. The firm is the largest provider of private educational services in China. Its offerings include English and other foreign language training, overseas and domestic test preparation courses, all-subjects after school tutoring, primary and secondary school education, educational content and software as well as online education.
Since its founding in 1993, the company has had over 55 million student enrollments. In fiscal year 2020, that metric was over 10 million.
Earlier in the summer, New Oriental released financial results for the fourth fiscal quarter and the fiscal year ended May 31. Total net revenues decreased by 5.3% YoY to $798.5 million for the fourth fiscal quarter of 2020. Operating income also decreased by 86.7% YoY to $10.3 million for the fourth fiscal quarter of 2020.
Executive chair Michael Yu commented:
As we guided in the previous quarter, the outbreak of COVID-19 pandemics around the globe starting from March posed continuing pressure on our key business lines. We saw challenges on acquiring new customers during the pandemics, and the enrollment for summer courses has also been delayed. For the fourth quarter of fiscal year, net revenue was down 5.3%, or 1% if measured in Renminbi. We see a mix of results amongst business lines.
He further noted, “The overseas test preparation business declined by approximately 52%, or 50% if measured in Renminbi. Overseas study consulting business grew by approximately 6%, or 11% if measured in Renminbi.” Management now expects total net revenues in the first quarter of the fiscal year 2021 (i.e., June 1 to Aug. 31, 2020) to be in the range of $911.2-$953.5 million, representing YoY drop of 15% to 11%.
Year-to-date, the stock is up over 21%. In the coming weeks, we expect China-based education stocks to come under pressure. We’d be a long-term buyer between $130-$135.
TAL Education Group (TAL)
52-Week Range: $33.35 – $83.68
The final stock on this list of education stocks is TAL. TAL Education Group is another pick from China, where it is a leading K-12 after-school tutoring services provider. The company, which operates in 90 cities, has comprehensive tutoring services to students from pre-school to the twelfth grade through three class formats: small classes, personalized premium services, and online courses. TAL’s offerings cover the core academic subjects in China’s school curriculum as well as other competence-centered programs.
In late July, the company announced results for the first fiscal quarter ended May 31. Net revenues were up by 35.2% YoY. Investors were also pleased to see total student enrollments of normal priced long-term course were up by 72.1% YoY. However, income from operations decreased by 26.8% YoY. Finally, gross profit increased by 27.6% to $481.1 million from a year ago.
“The first fiscal quarter revenue results were driven by a solid performance of online courses and the healthy growth of Xueersi Peiyou business,” said Rong Luo, TAL’s chief financial officer. “Our offline business may still face some continued pressure due to the COVID-19 outbreak, but as progress is made in containing the spread of COVID-19, we are working on the gradual resumption of our offline activities across different business segments.”
Despite continued pressures on TAL’s learning centers in the wake of the pandemic outbreak, analysts concurred that the business released robust results. So far in 2020, TAL stock is up over 56%. A decline toward the $64-level or below would offer better value in the Chinese private education platform.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.