After an extended rough patch for the stocks of for-profit education providers, it’s now investors betting against those equities that are on the defensive.
The For-Profit Colleges motif, a portfolio of 13 stocks, has risen 10.7% in the past month, which has lifted its year-to-date performance to a gain of 7.2%. The motif is up 9.6% since its creation in August 2012.
Why the new love for the sector? It seems to be both a measure of some investors digging for beaten-down bargains, and others forced to cover their short bets.
Consider, for example, the surge a few weeks ago in two motif components, Apollo Group and ITT Educational Services. As Bloomberg reported on May 17, the short interest in Apollo’s stock had reached 15% of its shares available for trading in April, its highest level since 2006.1 As the broader market rallied that week, Apollo’s stock rose 14%.
Similarly, ITT Educational jumped 24% the same week, after its short interest had climbed as high as 30.5%.
Then there have been the obligatory contentions that investors now have a key opportunity to find value in these long-struggling names, something not easily dismissed in lieu of the sector’s recent performance.
Last month, blogger Vladimir Zernov called ITT Educational a “cheap buy,” citing its continued profitability and its low price-to-earnings ratio (8.32 on a forward 12-months basis).2
On the other hand, it’s perhaps instructive for investors to remember why these stocks became beaten-down in the first place. As Dee Gill recounted last week in an article on Forbes.com, both enrollments and revenue have cratered at many for-profit colleges, following intense criticism that schools were encouraging students to accumulate massive debt for training in careers that couldn’t realistically fund repayment.
As Gill succinctly put it: “If you’re a value investor doing some company research and looking for money to be made, you may be lured by cheap-looking shares, like Apollo’s 7.3 forward price-to-sales ratio. But these valuations aren’t very useful at the moment, while the schools continue to shed students at unpredictable rates.”
It remains to be seen whether the rally in for-profit educators is anything more than momentary short-covering.
1Inyoung Hwang, “US Stocks Rally for Fourth Week Amid Economic Optimism, Bloomberg.com, May 17, 2013, http://www.bloomberg.com/news/2013-05-17/u-s-stocks-rally-for-fourth-week-amid-economic-optimism.html, (accessed June 11, 2013).
2Vladimir Zernov, “This Educational Stock Is a Cheap Buy,” The Motley Fool, May 17, 2013, http://beta.fool.com/zernov/2013/05/17/this-educational-stock-is-a-cheap-buy/34198/?source=eogyholnk0000001, (accessed June 11, 2013).
3Dee Gill, “Tempted By For-Profit Ed Stocks? Read This,” Forbes.com, June 6, 2013, http://www.forbes.com/sites/ycharts/2013/06/06/tempted-by-for-profit-ed-stocks-read-this/?partner=yahootix, (accessed June 11, 2013).