For-Profit Education Stocks: Are They Investment Grade?

NEW YORK (TheStreet) -- Every great teacher understands that a student, despite his or her personal obstacles, will rise to the level of expectations. But recently, for-profit education companies such as Apollo Group (APOL) and Strayer (STRA) have suffered due to high demands and stricter government regulation.

Source: YCharts

The entire industry, which has been under much scrutiny regarding poor student loan repayment rates, is getting remedial lessons in business economics. But as a consequence, not only have their collective student enrollments declined in the past two years, but so have their stock prices. And investors who bought into these companies are being lectured on the laws of supply and demand. But will they make the grade?

The chart above paints a very clear picture. It suggests struggles in the industry spanning the past couple of years. However, although the chart shows how this industry has traded in tandem, these companies are not all made the same. One such standout is DeVry ( DV), which is up nearly 30% so far in 2013.

DeVry, which can be considered one of the "seniors" in this industry, has consistently done its part to supply our economy with capable workers. Not to mention DeVry has one of the best and easy-to-understand businesses in this entire category. For this, the company doesn't get enough "credit."

Plus, from the standpoint of DeVry's program offerings, it matters very little in which industry a student might be interested. Whether it's health care, IT or journalism -- there's a program that will meets the needs of any student. Don't mistake DeVry's well-diversified offerings for a lack of focus.

What's more, with one of the best job placement rates in the industry along with a pristine balance sheet, it's hard to ignore the advantages that this company has over its rivals. And unlike Apollo's University of Phoenix program, which is the leader in enrollments by a meaningful margin, DeVry has been able to grow consistently without cutting corners.

Despite DeVry's strong fundamentals, which includes zero debt, while also being one of the best in the sector in year-over-year revenue performance, there is persistent negativity among those who cover the sector and insist on painting all of the companies with the same brush.

Its peer Apollo has received much scrutiny for the quality of its academic offerings. The company has had past dealings with the Securities and Exchange Commission, which had launched investigations against Apollo regarding how the company recognized portions of its revenue.

Although these concerns (among others) have gone away, shares of Apollo are trading at less-than-half of what they were at the beginning of 2012. Worse, the stock is one-quarter of what it was in January 2009. I believe that there is a compelling argument here that the stock, which trades at a price-to-earnings ratio of less than 7 -- one-third of the industry average, is undervalued. The same case can be made for DeVry.

Likewise, Strayer and Corinthian Colleges ( COCO), which have both been under pressure this year, are not too far behind. What's keeping investors at arm's length is not necessarily their collective poor performances but it's the bad publicity that this sector has received.

With regards to growing student loans and what has been compared to "predatory lending" during the housing bubble, I won't argue that there are several names within the group (if not all) that have had some serious struggles with "ethics." But as with the bank resolutions to the post-housing crash, the government has stepped in with tighter regulation.

We can debate the extent of the government's involvement and whether the Gainful Employment rule has gone overboard. However, I don't believe that this process, which is critical to protecting the federal investment in our students, diminishes the importance of for-profit education and the role that they can still play in the education future of the U.S. This service will always be in demand.

Along those lines, I think it's misguided to fear that the government's involvement will do long-lasting damage to the industry. I don't believe that will be the case. These companies still have the capabilities to provide opportunities for a wide range of Americans to build careers. To that end, if the government can curb some abuse with stricter policies, I think it's a good thing.

Likewise, as with good teachers with high expectations, good investors should dive head first into these stocks. If my suspicions are correct, in four years, several of these for-profit names, especially DeVry and Apollo, will graduate at the head of their class.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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