“A low-risk opportunity that could DOUBLE YOUR MONEY in less than a year!”

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Tom Jacobs runs one of the “premium” newsletter services at the Motley Fool — they call it Special Ops, and I’ve written about it before … but that happened to be for the Irregulars in the Friday File, so many of you might have missed it.

Special Ops says it looks for, as you might imagine, special opportunities — that’s usually characterized as being picks that have potential that’s not really correlated with the markets, special opportunities like spinoffs, mergers, orphans that fall out of favor, deep value plays, asset plays and the like.

He gives a free idea also — Energy Solutions (ES), which does management for operating and closing nuclear power plants and has a nuclear disposal facility, but which got clobbered after the Japan earthquake in what they seem to characterize as a “baby thrown out with the bathwater” situation. It also carries a lot of debt, scaring off investors, though Jacobs says that a close look at the books and their big long-term contracts makes the debt look less frightening. Interesting idea, with a long-term business that may well be undervalued as Jacobs believes, and an example of the kind of “buy scary companies, buy cheap” philosophy that I tend to like.

Oh, and of course this is a “limited opportunity” to subscribe to this hush-hush newsletter, and if you don’t buy in for two thousand bucks (oops, wait, sorry! It’s only $1,999!) before midnight tonight, your chance will be lost!

So let’s see what the picks are that he won’t tell us about for free, shall we?

“A low-risk opportunity that could DOUBLE YOUR MONEY in less than a year!

“Here’s the story: the entire for-profit education sector has a bad name, and the stock prices prove it…

“But remember, we love ugly investments. They provide us opportunities to grab up shares for pennies on the dollar, and later sell for a spectacular gain when sentiment shifts…

“You just need a discerning eye for current value and future demand… So let me ask you this, do you think the NON-profit education system is meeting everyone’s needs in a perfectly efficient manner?

“I’d say with technology and jobs changing at a breathtaking rate, for-profit education has a considerable role to play. It’s just inevitable.

“Not everyone can take time off and go to college on the college’s schedule. And the cost of college today versus job earnings — come on. It’s becoming an expensive luxury and not practical for many in our country.

“And the market has dropped the entire industry into the trash bin. We love that! Because if we pick through the trash, somebody might just have thrown out a Rembrandt…

“The company I’m looking at started with real universities and built out online and remote campuses. It has an excellent institutional investor backer. And it’s selling at a price you associate with a company about to go belly up. But I don’t think it’s going to!

“Sure, it’s going to be volatile — so as with many of our stocks — you have to be able to take the ups and downs. But we see this as a low-risk double or more within a year.”

So who is Jacobs teasing here?

Well, we have to pull the tarp off the Thinkolator and fire it up for this one — the clues are not all that specific or precise, so we need some extra cogitationizing … but we get a high degree of certainty that this is …

Bridgepoint Education (BPI)

And no, it’s not just the “baby thrown out with the bathwater” play in the for-profit-education industry — to some extent, Bridgepoint was the bathwater, they’re nowhere near as high profile as larger players like Apollo (APOL) and their University of Phoenix, or Washington Post (WPO) and their Kaplan division, which are, respectively, by far the largest universities in terms of national enrollment. But Bridgepoint was certainly right in the middle of the muck in the recent investigations into misleading practices in recruiting students, poor graduation and employment rates and implications of wasted federal student loan dollars, etc.

But they’re also the best match for these clues, and the Motley Fool itself has disclosed separately that they own some shares of the company, too.

“Started with real universities and built out online and remote campuses?”

Yep, it looks from my brief glance as though Bridgepoint was formed as an acquisition vehicle to start up a competitor to the University of Phoenix — but in so doing they bought up a near-bankrupt midwestern University, then called the Franciscan University of the Prairies in 2005. They later and changed its name to Ashford University, but this gives them a nice ivy-covered 100-year-old (almost) campus to show in their brochures and give them some gravitas even as 98% of their students are online.

Their other main asset is a more profesional school — in 2007 Bridgepoint acquired the Colorado School of Professional Psychology. This one got a name change, too, to the University of the Rockies, though it’s still largely a professional online school for psychology.

BPI has been around for a while, and can claim some history due to the longstanding nature of the colleges they’ve acquired, but the public company is almost brand new. They went public in April, 2009 — almost exactly the historic low point in the stock market, with a disappointing (of course) IPO that ended up being near $10. It shot up pretty quickly as the economy bounced back later that year, posting incredible earnings growth and substantially better margins than most of their peers — for the last year or so they have ridden the same ups and downs as other for profit education companies I checked, but the ups have been uppier and the downs less down-y, so they’ve come out far better than just about all of them. Despite the fact that they were singled out by Senator Tom Harkin as being a particularly bad offender in terms of recruiting students unethically and loading them with debt but leaving them stranded without marketable skills.

OK, he didn’t say they were just a “bad offender,” he used the word “scam.”

I have mixed feelings about for-profit education — I still consider myself an adjunct faculty member at a non-profit school even though I haven’t taught recently, but in recent years I’ve done almost all of my teaching online, similar to the kinds of classes and teaching that the for-profit schools do (though for lower tuition, I suspect). I think there’s definitely a place for more online education, and for-profit schools serve a niche, though I admit that I’m very uncomfortable with student recruitment that, anecdotally at least, seems far more based on “can this student get us some tuition money from federal student loans?” than “can we educate this student?”

But I also know that traditional educational institutions can be frustrating and lumbering beasts when it comes to keeping up with new technology, new pedagogy or even what you might call “customer service” in helping individual students — so I very much hope that the for-profits end up pushing the envelope further and making the whole education system better in the process, even though I also wish we could offer every student in the country as much education as they can handle without having to rely on the profit motive.

But there’s no particular reason for you to care about my educational philosophy — other ways in which Bridgepoint matches the clues?

Well, they do have an “excellent institutional investor backer” — that’s Warburg Pincus, the huge private equity firm which still owns 65% of the shares.

And yes, I’d agree that “it’s selling at a price you associate with a company about to go belly up.”

Bridgepoint is among the cheaper stocks I’ve looked at in a long time — there are good reasons for this, even aside from the fact that the industry is facing new regulations that might crimp their style to a substantial degree.

Cheap? Indeed, they trade at a trailing PE of 6.5 and a forward estimated PE of 7.2, which looks pretty cheap even compared to the beaten down sector. And if you look at other values that a private equity investor might also consider, like Enterprise Value to EBITDA, you get an even more remarkably cheap looking stock, EV/EBITDA is down well below 3 (thanks, in part, to a strong cash position — almost five bucks per share in cash, and no debt according to the Yahoo Finance summary).

Bridgepoint is going to be investing in capital improvements on their physical campus, Ashford University in Tom Harkin’s home state of Iowa, which might help them to smooth the feathers of his Senate committee — but really, as Jacobs implies (assuming the Thinkolator is right this time — this is our best match, but the clues are not definitive), if you’re investing in this stock it’s because it’s been tarred as a scam and is therefore cheap cheap cheap. If it gets through this, as most companies who face bad news do, then it will be a great investment if it continues its blistering enrollment growth and — after some margin compression this year as they invest in their campuses and, I assume, scale back on their aggressive recruiting — returns to something like a market multiple.

If Bridgepoint carried the same forward PE as Apollo Group, a much bigger company with substantially lower margins and slower growth, it would be priced at around $30 even if you don’t consider the bigger potential cash flow that’s hiding behind those earnings (that’s a forward PE of 12.5 on forecasted earnings of $2.50 next year, a drop from $2.89 over the last 12 months). It’s at $20 now, so you can make a logical argument for a higher price if the company gets through this regulatory storm relatively intact.

I don’t know what’s going to happen with federal rules, but that’s clearly the major issue for almost all for-profit education companies: they wouldn’t exist without federal student loans, which provide the lion’s share of funding at virtually every one of these companies. So whatever line there is, they have to toe it — but that doesn’t mean that the industry is going to be cut off, or that it will disappear, it just means the risk for specific companies is pretty high if they screw up, and there’s an overall risk that profits will drop for the sector as they spend money on compliance and perhaps admit fewer inappropriate students or offer more refunds. And more scrutiny, of course — especially when for-profit graduates (or non-graduates) help to boost the default rate to near 9% for student loans, thanks in large part to their failure to find jobs.

The line itself is in flux, recent reports sounded somewhat promising for these companies in regards to the details for program approval (the original announcement as rules started flowing was here, the latest update is here), but I certainly don’t know how it will work out.

I’m not personally inclined to buy any of the for-profit education stocks, but if I did I’d probably avoid the middle of the pack and look either at the company that looks more like a distance learning gold standard, American Public Education (APEI), which is relatively expensive, or the cheapest stock in terms of valuation, which I agree is probably Bridgepoint. And I’m pretty sure the Motley Fool Special Ops folks are buying it, though, as I said, the lack of specific clues makes this less than the 99% certainty that I usually aim for in our Thinkolator output.

Got an opinion on for-profit schools, or on Bridgepoint specifically? We’d all like to hear it — just share your thoughts with a comment below. And if you’ve tried out Special Ops, please click here to review it for us (if other readers have reviewed it, you’ll see their opinions over in the right side of this page).


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9 Responses to “A low-risk opportunity that could DOUBLE YOUR MONEY in less than a year!”


  1. First, Ashford U is not to be confused with Ashwood U, a fake degree outfit that will sell you a PhD with transcripts for $500. Second, i wasn’t clear from your write-up, are they under investigation?

    Like(0)

    • Hi Gary. I don’t know whether the investigation is currently ongoing — they have received the findings from the inspector general’s office (in the Dept. of Ed.) and they also suffered from the findings of the GAO, which found systemic problems. I suspect the investigating will continue regardless of whether they’re technically under investigation at the moment.

      I should note, also (and should have included in the brief notes above, sorry!), that Warburg Pincus filed to sell their holdings back in late July. I don’t know that they’ve done so yet, if so it’s not yet reported that I’ve seen , but that was certainly a significant action that helped drive the shares lower and may hurt them further still. The risk of any stock that’s majority held by an investment group is that the group will want to get out, and I should have clarified above that “backing” by a venture capital firm is a double-edge sword … usually it’s not public companies who get or keep the backing, the funding or bulk ownership from private equity/venture capital companies is there because they invested a lot in the firm in the past to bring them public and they’re going to want their money back … which they can really only get by selling. Which can often provide a headwind to the shares, particularly if news is otherwise not encouraging.

      Like(0)

      • The student debt in this nation is nothing like “a drop in the bucket.”
        The total student debt of a trillion dollars exceeds the total debt on American’s credit cards. If this nation does not produce jobs for these graduates, we have another bursting bubble in the making.

        I suggest reading some of the work by Hacker & Dreifus to put this in perspective.
        There’s nothing trivial about that debt.

        Like(0)

        • True, but as a part of the budget it’s trivial — student debt overall is huge, but annual government spending on debt subsidization is very small, and as we’re all learning, big long-term problems get ignored if a solution doesn’t look voter-friendly within the current two-year election cycle.

          Like(0)

  2. I don’t know the motivation for the investment company, Warburg, but intuitively this stock is really swimming against the tide. The major source of funding for these firms Apollo, Bridgepoint et al. is federally funded programs.

    The U.S. is broke, and any derivative play counting on government money is for speculators and traders. I have many speculative positions, but Bridgeport is does not seem to make sense, unless one can be sure of continued government money.

    Like(0)

    • Thanks for the thoughts, Jack — you may well be right. Personally, I don’t think we’re at risk of seeing less government funding for higher education loans — that’s a drop in the budget bucket and it’s arguably an investment in human capital that we need (and if people stop being students then they start being unemployed, which is not what the feds want). But I do think that the money will be a beacon for regulator attention as it goes to for-profit firms and those firms post juicy profits, as Bridgepoint has in the past. My initial sense that there’s something attractive about Bridgepoint is largely just from the fact that they’re so dreadfully cheap that if they don’t go out of business they’ve got plenty of room to move the share price up because of that cheap valuation.

      Of course, dreadfully cheap companies are usually, well, dreadful. And sometimes that cheap later turns out to be expensive, it takes a strong bladder and more research than I’ve done here in my quick writeup to want to put your money into these kinds of stocks.

      Like(0)

    • Jack, Apollo may be different than the others, because a large percentage of their students seem to come from industry. In other words, University of Phoenix seems to have far more students who work (that’s one good thing!) and that have their tuition paid by their companies, instead of by federal student loans.

      Like(0)

  3. I teach online for University of Phoenix and I’ve seen a lot of changes in the 9 years I’ve been teaching. I have a Ph.D. in Instructional Technology, and UoP uses a lot of ISD (Instructional Systems Design) methodologies.

    They redesigned their programs for students with less than one year of previous college, to give them a start on improving their education, but many of these students are still not at college level. This is more a reflection of their inferior public school educations than UoP’s recruiting tactics, which have improved a lot in the last two years.

    As a long-term instructor, I receive a stock bonus every year, and I was on the stock purchase plan for about two years. I’ve dropped out of it, but I still expect to get 40-50 shares as my 2011 bonus.

    I’m not recommending a buy, but I expect Apollo stock to do well when the economy improves and their better students (and there are many good students) move up in the labor markets.

    UoP is cleaning up its act and offers an opportunity for a higher (or at least better) education than many students have now, and I expect this to benefit Apollo Group in the next two to five years.

    Like(0)

  4. I sure would like to learn what stock Charles Mizrahi is referring to in the promo by William James for Mizrahi’s Hidden Values Alert that discusses a “Toll Bridge Stock” by which you will supposedly earn at least 168 percent in 12 to 18 months. Buy the service and you get the special report, “Double Your Money With This Toll Bridge Stock.” The idea is that the maker of something used in all smart phones gets a small percentage of every smart phone sale.

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