Education Stocks on Obama's Honor Roll

Some analysts believe these stocks could be poised for a good year thanks to several important catalysts, including government spending.
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As Barack Obama prepares to move into the White House, the Democrats aren't the only ones celebrating.

Education stocks have rallied over the past week, thanks in no small part to newly released details about Obama's proposed stimulus package. A positive earnings report from

Apollo Group

(APOL)

also helped the group advance, and analysts say that several important catalysts could push names like Apollo and

Career Education

(CECO) - Get Report

even higher in the coming months.

Over the last year, education stocks have performed well even as the major stock averages have tumbled more than 35%.

Corinthian Colleges

(COCO)

has risen 27%, and

Strayer Education

(STRA) - Get Report

has climbed 15%.

Grand Canyon Education

(LOPE) - Get Report

, public only since November, has jumped 70% in that time.

Even the sector's laggards have bettered the broader indices, with

DeVry

(DV)

slipping 9%, and

Capella Education

(CPLA) - Get Report

losing 15% over the last year.

The group has already started 2009 with a bang after details of the incoming Obama administration's economic stimulus package were released by the House of Representatives. While the companies themselves are unsure what the impact of an Obama presidency will be -- during an earnings conference call a week earlier, Apollo Executive Vice President Greg Cappelli said "it's just too early to say how that's going to turn out" -- analysts say the new administration's plan will usher in major positive changes for the group.

While Obama's stimulus package has promised to modernize classrooms in the U.S. and to fund special education and other K-12 programs, FBR Capital Markets analysts Matt Snowling and Bill Jackson said Thursday that the House's bill seeks to increase unsubsidized Stafford student loan limits by $2,000. It would also boost funding for Pell grants, which aid low-income families sending children to college, by $15.6 billion over two years, increasing the maximum grant by $500 from $4,850 to $5,350.

(

Photo gallery: Obama Takes Office

)

"The fairly expansive increase in higher education funding is expected, in our view, due to the limited availability of private loans and the likelihood that rising unemployment may cause an increase in workers returning to school," the FBR analysts wrote in a research note.

The education group surged after the House's draft was released. If passed, the stimulus plan would dramatically decrease the need for students to secure private loans to cover gaps in financing.

"That would be a watershed positive for the group," says Trace Urdan, analyst with Signal Hill Group. "I think it's going to take a while for the full implications to be felt. First, this bill has to pass. The multiples of the stocks need to recalibrate. I still believe that we're in a period of heightened growth, and I don't see that slowing down anytime soon."

It's conceivable that even if the financial package were to pass immediately, the response would be felt for many months. Gary Bisbee, analyst with Barclays Capital, notes that the benefits from a July 2008 decision to increase Stafford loan limits are still showing up now, six months after the change.

"The phenomenon of the higher loan limit allows more potential students to fully fund an education without using their own funds," says Bisbee. "That clearly has had a positive impact on most of the companies in the space."

Another spark plug for the education group was

Apollo's strong earnings report

, which showed that new enrollments have been accelerating. The report pushed Apollo's stock to a 52-week high and had other names trading higher. During the company's conference call, Apollo's management said some of its enrollment growth was attributable to the current economic conditions.

Even though the economy is struggling, the trend for these stocks is a positive one right now. "The companies haven't been public long enough to experience many cycles, but the ones they have experienced are pretty clear," says Urdan. "You can see very clearly that enrollment goes up when

gross domestic product goes down. It's most obvious at the vocational end of the market, like for a company like Corinthian that is focused exclusively on the 10-month certificate and diploma market."

Analysts say that several other events could push stock prices even higher later this year, and continued job losses could be the most immediate of those catalysts. For all of 2008, roughly 2.6 million workers across the country were put out of work, most of them in the final one-third of the year. Most economists don't expect the U.S. economy to rebound until much later in 2009, which raises the specter of more job losses through the beginning of the year.

"There's probably a point at which job losses and the employment market become so weak that it becomes more difficult for these schools to place their graduates in high paying jobs," says Bisbee. "But for the next couple of quarters, my expectation is that a weaker economy should help enrollments at many of the companies in the space."

While it may be hard to find a silver lining in economic releases, such as the

December jobs report

, which showed that a half-million workers lost their jobs, Urdan says that in times like these the U.S. population begins to understand the connection between spending money on education in order to get a worthwhile payoff.

Urdan adds that the return on investment for the expenditure is something people believe in. "Even though nobody wants to borrow anything right now, they're still willing to borrow in order to be able to go to school because they firmly believe that it's going to pay off for them," he says.

The logic is simple: When there's an abundance of $9 or $10 an hour jobs available, a person is less likely to invest in an education that would earn them a medical certificate and a job that would pay $14 an hour. The investment, Urdan says, doesn't make sense when the other jobs are already available. "But when those $9 or $10 an hour jobs dry up, a pretty good prospect of earning $14 an hour looks a lot more appealing," he added.

Of course, this trend isn't isolated to the vocational end of the market. For instance, Apollo Group has master's level courses, and Cappella Education offers a Ph. D. program. "Even at those higher levels, it's true that when the economy weakens people feel more anxious," Urdan says. "Even if they're employed full time, they feel the need to invest in their resume to be more competitive. Even those numbers strengthen when the economy weakens. Everyone gets serious about this stuff."

Another side effect of the weakening economy that has helped the education group is the fact that marketing costs have moderated for much of corporate America. "I think that for most of the industry, this is a big cost benefit," Bisbee says.

In addition, a positive for the group is the fact that the U.S. government has made additional funds available to lenders such as

Sallie Mae

(SLM) - Get Report

,

Citigroup

(C) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

.

That's not to say every investor is bullish on the education sector. The ultimate bear case anticipates that the economy deteriorates so badly that even if loan dollars are available, students will not want to take on any debt whatsoever.

"That's the doomsday scenario, which is that we reach a tipping point where everything is so bad that you're so discouraged you don't even want to take out an education loan," says Urdan. "For now, people firmly believe that investment is going to pay off for them. Certainly those betting against these stocks believe that's going to change, but there's no evidence that's going to happen yet."

And just as the group has performed well in a slumping economy, there is a risk that the sector will come under selling pressure once a rebound begins.

"This is the one group that is working, and it'll continue to work until investors see a recovery," Urdan says. "Then this group will become a source of funds. The risk of an improving economy is not that the enrollments will slow down right away, but that the multiples will potentially contract once there are other places to put money."