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Education Stocks: 2011 Outlook

(Educations stocks' 2011 outlook report updated with DeVry and Capella Education quarterly results.)
NEW YORK ( TheStreet) -- Stocks in the education sector underperformed the S&P 500 (^GSPC) last year for the second consecutive year. Performance in 2011 is expected to remain volatile amid regulatory uncertainty , but TheStreet takes a closer look at key industry players and how each is expected to perform.

The Department of Education is expected to unveil a final version of what is known as the "gainful employment" rule which would cut federal aid to schools with more than 65% of students unable to repay hefty loans. Federal aid to for-profit education providers came to nearly $150 billion in the last academic year.

RBC Capital Markets analyst Robert C. Wetenhall said he expects the final version "will be comparable to or less onerous than the previously published draft version." Still, he told TheStreet that it's "tough to get excited about the [education sector's] outlook" for 2011 given the lack of a hard catalyst, or "something dramatically material likely to provide torque to the stocks."

The Obama administration's proposed education regulations 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 would 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, a rule stipulating that no more than 90% of a for-profit education provider's revenue may be generated from the DOE's federal student aid program.

Bob Phillips, managing partner at Spectrum Management Group, told TheStreet "the general macro outlook for the sector is not good." He views the education sector as "a bubble fueled by free government money."

Citi analyst James Samford suggested investors "stick with the clicks," meaning schools that offer online postsecondary education programs as opposed to more traditional classroom and campus settings. He estimated that nearly a third of all students took at least one course online in 2010. Nearly half of students taking at least one online course, around 3 million, were taking programs exclusively online he said, a number he expects will grow to 5 million by 2015.

Samford also encouraged investors to consider schools with lower-priced programs. Even as the nationwide unemployment figure is expected to drop by 60 basis points this year, "sustained unemployment levels above 9% will continue to offset a complete tailwind reversal" that would normally affect school stocks during a recovery.

With all this in mind, here then is a rundown of 2011 expectations for each of the major education sector players.
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