Some stocks from pummeled for-profit schools attractive
Shares in companies that run for-profit colleges have been smashed this year.
The industry will survive, but not all its members. An index of 13 education companies has declined 32 percent this year. These institutions may face reduced enrollments because the federal government is tightening rules for student loans. Yet some of the stocks have been punished too severely, I believe.
Apollo Group Inc., the largest education company in terms of enrollment, appears attractive to me at the current price of about $35 a share. The stock began this year at about $61, down from more than $97 in 2004.
Phoenix-based Apollo includes the University of Phoenix system, which has more than 538,000 alumni, according to the company’s website. Its students attend classes online or in sites around the country.
Apollo and its rivals face new federal regulations and harsh criticism.
Critics say the for-profits recruit students willy-nilly to snag tuition dollars, regardless of whether applicants have the skills to handle the coursework.
The loan repayment rate is only 36 percent for for-profit colleges compared with 54 percent at public universities and 56 percent at private nonprofit schools.
The for-profits say their higher default rates result because they serve a higher percentage of students from poor backgrounds, belong to minority groups or have parents who never attended college.
The for-profits have a point there, but whether they were greedy doesn’t matter anymore.
New rules may come from the Education Department, Congress or both.
The department proposed denying federally guaranteed loans to students who plan to attend a for-profit program with a repayment rate of less than 35 percent. The rules would impose enrollment growth restrictions on for-profit schools with repayment rates of 45 percent or less.
My judgment is that Apollo exceeds the 35 percent repayment rate standard and can get to the 45 percent level pretty easily.
By contrast, some competitors may have a hard time living up to the new standards. For example, I would avoid Corinthian Colleges Inc.’s stock.
Corinthian, based in Santa Ana, Calif., says it operates 100 schools in the United States and 17 in Canada. In my opinion, it will have a difficult time consistently exceeding the 35 percent threshold.
Corinthian has another problem. On Nov. 2 it said students may have to pay higher tuition prices because “a substantial percentage” of its colleges may be in violation of an existing federal rule that limits federal student aid to no more than 90 percent of a college’s revenue.
Career Education Corp., based in Hoffman Estates, Ill., said in August that its culinary and art-and-design courses “would be more impacted” than its health and university segments.
Career Education as of Sept. 30 had $284 million in cash and equivalents and $159 million in short-term investments. This hoard may help it pay for, and withstand, the transitions ahead.
Another for-profit I like is DeVry Inc., with headquarters in Downers Grove, Ill. It has a strong reputation in health-care and professional-development courses. The company says that 90 percent of its graduates find jobs in their chosen fields.