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Education Stocks: A Remedial Lesson

Stocks in this article: COCO STRA APOL DV CPLA ESI

NEW YORK ( TheStreet) -- My time spent in the world of education taught me students will always rise to expectations.

But investors in for-profit education stocks including Corinthian College (COCO) and Strayer (STRA), which have declined by 26% and 37%, respectively, for the year to date, have learned  expectations can also yield disappointment. COCO closed Friday up 2.8% at $1.82, STRA was down 8 cents to $35.20.

Given the frustration investors are likely feeling already, I wonder at what point reality sinks in when it comes to these stocks? After having peaked in early 2009, this entire industry has suffered from low student enrollment and stricter government regulation, thus underperforming the market for years.

Strayer and Corinthian have posted a five-year decline of 83% and 88%, respectively. So this is not a situation where investors were blindsided by the lack of execution. Given the significant amount of scrutiny surrounding issues like poor student loan repayment rates, the Street "dropped out" of these stocks a while ago. The business economics of this industry no longer works.

Essentially, with the government's involvement -- particularly the gainful employment provisions of the Higher Education Act, which seeks to protect students from (among other things) predatory lending practices -- weakens the effectiveness of these institutions. As it stands, the Street believes irreparable damage has already been done, given that several names within this industry have had some serious struggles with "ethics."

Take, for instance, Apollo Education (APOL), which owns the University of Phoenix program, the leader in enrollments by a meaningful margin. Despite the company's nearly 30% stock gains for the year to date, Apollo has dealt with the Securities and Exchange Commission, which once investigated the company regarding how it recognized portions of its revenue.  Apollo has resolved these issues and the shares are up 30.5% from 2012.

Don't think this stock is cheap. On the flip side, I would be careful about getting too impressed with the stock's gains, most of which occurred in the last three months --  which means it can easily be lost. Not to mention, Apollo continues to receive more than its share of criticism about the quality of its academic offerings.

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