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TheStreet Open House

For Investors, It Pays to Skip School Stocks

BOSTON ( TheStreet) -- For-profit post-secondary schools, known for their flexible schedules and aggressive marketing techniques, boomed over the past decade, particularly as people bet that a college certificate would boost their employment chances in the midst of the recession.

They also benefited from huge demand for college and vocational programs that the public sector couldn't meet, low borrowing rates, the increased availability of federal student loan funding, including the G.I. Bill and Pell Grants, low cost and online-course delivery.

But the tide has turned on the $35 billion business, and its prospects appear dimmer almost by the day. Its biggest challenge is the increasing government scrutiny over high student loan default rates, questions about whether its degree offerings actually help their graduates further their careers, some schools' ethics in recruiting vulnerable students and, finally, whether demand will wane as the job market recovers.

As a result, investors are giving the educators' shares an "F," despite some analysts' "buy" ratings on these stocks.

The S&P Education Services Index, which tracks for-profit educational firms' shares, is down 21% this year and 28% annually over the past three years, versus the S&P 500's gains of 10% and 21%, respectively.

At the very least, the industry is due for a shakeout, given the overriding trends it faces. "Despite a spectacular multi-decade run, we believe increased regulatory scrutiny of the for-profit education sector is forcing participants to react and adapt to potentially game-changing rules, which are likely to alter the industry landscape for years to come," wrote Peter Wahlstrom, Morningstar's educational services industry analyst, in a research note last week.

Similarly, S&P analyst Michael Jaffe reported that "following much improved operating results in 2009 and 2010, many U.S. for-profit educators have been experiencing highly diminished performances over the past few quarters, and we see results remaining (that way) for an extended period.

"We think the less favorable outcomes have stemmed mostly from new regulations being put in place by the Department of Education" in an effort to lower student loan default rates, he said.

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