Gurus Find a Pick in the Classroom

This column was originally published on RealMoney on Sept. 8 at 3:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

The quest for better jobs invariably leads many of us to get training or an education that will enhance our skills and therefore our marketability in the workplace. Several for-profit companies have been mining this demand and building profitable businesses as a result.

One of these is Pittsburgh-based Education Management(EDMC Quote). It provides post-secondary, career-oriented education at 71 campuses in 24 states and two Canadian provinces, as well as online. It awards a full range of degrees including associate, bachelor's, master's and doctorate. Total enrollment at EM's schools is nearly 60,000, a 12.6% increase from last year.

The stock, which trades around $34, has become a teacher's pet of two of the guru strategies I follow. They grade this stock an A, and you probably will, too, after seeing why.

The Martin Zweig Strategy

One of the strategies that likes EM is the one I base on the writings of Martin Zweig. The Zweig strategy looks for a company's earnings growth rate to be comparable to its revenue growth rate. That's because for earnings to continue to grow over time, they must be supported by a comparable or better sales growth rate, not just by cost-cutting or other non-sales measures. EM's annual revenue growth rate is 27.4%, while its earnings growth rate is 29.7%, based on the average of the three-, four- and five-year historical EPS growth rates. EM passes this test.

The Zweig strategy also examines sales growth from a quarterly angle. To evaluate this, it compares sales from this quarter last year with sales in the present quarter. EM experienced an 18.3% increase between those two quarters. The strategy then looks at the previous quarter last year compared with the previous quarter of the current year, which was 16.8%. Finally, it compares the two and wants the sales growth for the current quarter calculation to be greater than the previous quarter calculation. EM meets this criterion.

Next, the Zweig strategy looks at earnings stability. To rate with this strategy, a stock has to pass four criteria:

• Current EPS must be positive.
• EPS for the quarter a year ago must be positive.
• The growth rate of the current quarter's earnings compared with that of the same quarter a year ago must also be positive.
• Earnings growth for the past three quarters must be positive and steady.

EM passes all of these tests.

Next, the strategy looks at earnings growth. The Zweig methodology requires EPS growth for the current quarter to be greater than that for the prior three quarters, which it is for EM. EPS growth for the current quarter must also be greater than the historical growth rate, a test that the company also passes. The company must also have persistent annual earnings growth and long-term -- defined as more than five years -- EPS growth. Again, EM passes both of these.