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TheStreet Open House

For-Profit Education Stocks: Winners & Losers of 2010

(Education stocks' 2010 year-in-review report updated with Capella Education broker action.)
NEW YORK ( TheStreet) -- Stocks in the for-profit education sector had a rough 2010. Regulatory uncertainty weighed on the sector, criticism about colleges' graduation rates and student loan repayment rates abounded, future enrollment figures were called into question, schools were accused of failing to adequately prepare students for profitable careers yet leave them saddled with heavy debt , and federally proposed restrictions on the industry's business operations cast a shadow no bull market could fully offset.


The average stock in the for-profit education sector fell 24%, even as the S&P 500 rebounded 9.7%.

Robert C. Wetenhall, equity analyst at RBC Capital Markets, noted that 2010 was a particularly challenging year for for-profit postsecondary education providers. His research showed that $1 invested in the for-profit education sector at the start of 2010 would now be worth just 73 cents; by contrast, the same dollar would be worth $1.06 had it been invest in the S&P 500.

The S&P 1500 Education Index, which tracks the industry, dove 34% from June through August, a retreat that began after the Obama administration announced June 16 that it would seek regulations aimed at stanching for-profit schools' high rate of student-loan defaults and curbing their aggressive marketing practices.

"In general, career advancer schools that have a robust consumer value proposition in which graduates typically obtain a promotion or a pay raise fared better than career switcher schools which focus more on retraining unemployed workers for new careers," the analyst wrote.

For-profit education sector strength in recent years, particularly in 2007 and 2008, "reflects the counter-cyclical nature of the for-profit education industry, which historically achieves faster enrollment growth when the economy starts to weaken," Wetenhall said, adding that continued "high unemployment should provide a tailwind which will help companies in our coverage universe either meet or exceed challenging enrollment comparisons."

The Obama administration proposed regulations that cover everything from restricting incentive-based recruiting practices, the need for new job-training courses, and taking action against schools which fail to advertise honestly to requiring schools to notify students of graduation and job placement rates. Institutions will also be required to limit student enrollment to those who have high school diplomas or can readily demonstrate their readiness for university-level education. Schools must also comply with what is called the 90:10 rule in fiscal 2012. The rule stipulates that no more than 90% of a for-profit education provider's revenue may be generated from Department of Education's federal student aid program.

Arguably the most controversial of the proposed regulations, known as the "gainful employment" rule, expected to be issued early in 2011, would cut federal aid to schools where less than 45% of students are able to repay their loans. Federal aid to for-profit education providers came to nearly $150 billion in the last academic year.

The gainful employment rule will consist of a two-part measurement to determine a program's eligibility to receive federal student aid. The measurement is based on loan repayment rates and debt-to-income ratios, and requires a minimum of four years of repayment history and three years of employment history. The rules would go into effect in the middle of next year.

The Institute for College Access and Success, a student-advocacy group, said in August that its research showed nearly two-thirds of for-profit colleges' students were not repaying their loans .

Here then is a roundup of 2010 winners and losers in the for-profit education sector , ranked by year-to-date share price returns, from bad to good.

(Stock quotes are based on closing prices on Dec. 7, 2010.)

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