Zacks Picks for Obama Presidency, part two

By Travis Johnson, Stock Gumshoe, November 8, 2008

When I last wrote, it was to share with you some stocks that the folks at Zacks think will be the winners under President Obama’s White House leadership … but I didn’t finish the job. I gave you two stocks that they appear be touting as beneficiaries of our next president’s policies, but there were others, too.

So today, I’ll see what I can tell you about another stock that Zacks thinks you should buy right now.

If you want to catch up with the rest of the class, you can click here to see that story. If you still remember that one (the stocks were Trina Solar and Wabtec, just to spoil the surprise), then we can all move right along together.

Here’s another one …

“Obama Stock #3: Extra credit for educational enterprise.

Refundable tax credits of $4,000 for college students may be on the way. This will make funding easier for non-traditional students, creating a huge growth opportunity for an online and campus college. This school has just opened three new campuses and is poised for a jump in its stock price.”

I don’t know, of course, whether or not that funding will come through — personally, I’d like to see much more government support for higher education, and I think it would be best if it went through students instead of through grantmakers and states, since that would help to make universities refocus on education and pay more attention to their customers. But I used to work in higher education, so I’m probably quite biased in that area.

And there’s one part of higher education that has always focused primarily on its customers, because they make a profit from them, and don’t get fat research grants or alumni contributions: For profit private colleges.

And this particular one? Looks to me like Strayer Education (STRA).

Strayer did open three new campuses for this current Fall term, and they do have a large number of physical campuses up and down the East Coast, as well as a large online teaching platform, so they fit the few clues better than their competitors.

Like almost all for-profit education providers, Strayer is considered counter-cyclical — so unlike almost every other stock in the market, it’s not shockingly “cheap.” When people see a recession coming, they go back to school either to escape the downturn or to sharpen their skills to keep or improve their professional standing … and when investors see a recession, they buy for-profit education stocks. This downturn, so far, appears to be no different.

The one big for-profit education stock that generally does seem a bit more cyclical in most markets is the Washington Post Co. (WPO), partly because, as the name suggests, they use a lot of the income from their education division to pay for the less profitable newspaper and media businesses, and partly because the Kaplan division of the Post includes not just private colleges but also a fair amount of professional licensing and testing types of businesses that run closer to the economic cycle. WPO, just FYI, now gets almost half of its revenue from Kaplan. And in the interest of full disclosure, I subscribe to their flagship newspaper. Thankfully I don’t own the stock — it has been cut in half this year.

There is certainly plenty of potential downside for these kinds of stocks — if lots of extra funding doesn’t come through for education, as Zacks noted in the tease, and the credit system remains tight, there’s certainly every chance that these firms will continue to have the same funding problems as all other producers of capital goods and services who depend on the ability of their customers to borrow money. If student loans are tough to get, colleges and universities suffer just as surely (if not as severely) as car dealers suffer when auto loans are tough to get. So far, most of these firms seem to not be having serious problems with student loan debt that they hold, and their enrollments are still going up in most cases, so it seems likely that their students are still getting private loans, but it’s certainly a potential concern going forward.

And beyond that, if nonprofit education improves significantly, or the overall size of the student pool shrinks, for-profit schools will have to work that much harder to take students away from traditional education. Given the huge advantage a for-profit school has over many entrenched, bureaucratic and traditional educational institutions in terms of flexibility, staffing, ancillary costs (ie, dorms, athletic teams, grassy swards, etc.) and marketing, and their focus on profitable vocational and professional degree and certificate programs, I would guess that the better for-profit schools will probably continue to do just fine.

The landscape is changing, however — the state-run and nonprofit schools are certainly taking many pages from their profitable competitors, including offering students more flexibility, online classes, and degree and non-degree programs that are much more focused on vocational skills, professional development, and career advancement. And on the flip side, while the professional who’s going back to school part time is the core customer for many of the for-profit schools, many of them also have made significant inroads in the traditional undergraduate student market. As long as education continues to be an important part of advancement in America, and that doesn’t seem to be changing, there will probably continue to be plenty of room for quality schools of all stripes, whether or not they have to make a profit.

Plenty of room doesn’t mean that there’s any lack of competition, however — and what these schools don’t waste on athletic programs or fancy dining halls they spend on marketing, it’s not unusual for for-profit colleges to spend 20% of their tuition income on recruiting new students, and with much of the education delivery moving to the internet they can all compete that much more fiercely, without the regional strengths that many of these institutions enjoy in terms of actual physical school locations.

There are a number of decent size companies in this space, some of which have had checkered pasts. I don’t know anything negative about Strayer, other than the fact that the shares have a premium valuation to go with their well-above-average growth rate.

Other stocks in this sector, many of whom have held up very well during this year’s downturn, include software provider Blackboard (BBBB) and fellow school operators ITT Education (ESI), Corinthian Colleges (COCO), DeVry (DV), and Apollo Group (APOL). Of the major for-profit schools, Strayer is in the top tier when it comes to gross profit margin and growth rate, so that’s at least one indication that this might be worth a look. Apollo, operator of the massive University of Phoenix network, is by far the largest of these companies.

Strayer shares have bounced nicely from their recent dip during the market’s awful September and October, and now trade at about the same $220 level that they bumped around for most of the Summer. Not cheap, but certainly one could argue that the fundamentals support their valuation. If you’d like to see a free article that runs down some of these companies according to Zacks, that’s available here.

Feeling smarter yet? The tuition at Stock Gumshoe University remains free, thanks in part to the generous support of our most gracious Alumni, the Irregulars.

Have a great weekend, everyone. Study hard!

full disclosure: I teach occasional classes as an adjunct faculty member at an online university, though it’s run by a state, not a private company. I don’t own any stocks mentioned above.

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Myron Martin
Myron Martin
November 8, 2008 10:34 am

Travis: On the subject of education and the effects of the Obama presidency you might find this of some considerable interest! What people need MOST in these unique times we are experiencing is some BASIC ECONOMIC understanding that is woefully lacking in our modern educational institutions geared to the fiat money/central bnking system.

This is from an essay that I just sent to my son, SOURCE” PDF Link:

“I remind you also of my previous submission for voters to keep in mind at all times that “NO GOVERNMENT can give you anything that it does not first take away from someone else” just another way of expressing the wisdom of Thomas Jefferson, and I quote:

“If the American people ever allow private banks to control the issuance of their currencies, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered.”

-Thomas Jefferson (Ode to Freddie and Fannie)

What an amazing insight from long ago given the rapidly escalating foreclosures of private homes and near bankruptcy of major corporations such as the big three auto companies and already collapsed financial institutions. We live in interesting times.

You might want to subscribe to this free publication from Casey Research, it offers the BEST analysis I have yet seen of the likely course of an Obama presidency. Here is an excerpt that summarizes the first essay, but those that follow also have intriguing insights and are well worth reading!

“Reviewing his career and the few picks for key staff he has made so far, the pattern that emerges is so clear that I am becoming convinced that he is, in fact, going to try to reshape the world… but by using the broken tools of more government, more regulations, more taxes, and all funded
by more funny money.

When a power that considers itself irresistible meets an economic challenge of the sort and make- up we now face, the result can only be an explosion. Either in the form of a massive surge in government power or an outright economic disaster as businessmen are chased from the scene
through the disincentives of more taxes and regulations, leaving in the void public works programs and fiat money-fueled public handouts.”

In case you don’t find time to read this rather lengthy report in full I have also lifted the following CLASSIC economic treatise I am archiving in my “Economic Wisdom” file for future reference and easy access!

You may have seen this before as I have, but this time I am making sure that I know where to find it again.

Bar Stool Economics
You may have seen this before, but even so, it is worth a revisit as we head into the Obama years…

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes, so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share”? They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink their beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now paid $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before and the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than me!”

“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up. The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start
drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

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November 8, 2008 10:42 am

I suggest you check out, and you’ll see that this “lesson” in taxation is an urban legend:

Prof. David Kamerschen has denied that he is the author and says he doesn’t know who is.

Bar stool economics is best left in the bar.

November 8, 2008 1:19 pm

Did see some interesting stats. World GDP is $60 Trillion. Forbes recently published richest 400 people had a net worth of $1.47 Trillion. Skewed? Who’s to know. I suggest we educate ourselves to best look out for our own unique situations, and be prepared to help those close to us.

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Cindy Schermerhorn
Cindy Schermerhorn
November 8, 2008 2:01 pm