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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