Time To Be Greedy!

| September 9, 2010 | 0 Comments

Have you ever gone against the grain on an investment?

If you answered “yes”, give yourself a pat on the back.  You’re following in the steps of some of the greatest investors of all time.  Warren Buffett, George Soros, Peter Lynch, and many others have made huge fortunes with this simple investment strategy.

Some call it “value investing”.  Others know it as “contrarian investing”.  But the strategy is one in the same.

At its heart, value/contrarian investing is attempting to profit by going against conventional wisdom when it appears to be wrong.  The basic principle is crowd behavior will often push stock prices to extremes creating opportunities for big profits!

As Warren Buffett, arguably the greatest investor of all time, has said:

“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be mis-appraised.”

History shows this type of environment creates huge profit-making opportunities.  George Soros, another hall-of-fame investor and contrarian, summed it up perfectly when he said:

“The worse a situation becomes the less it takes to turn it around, the bigger the upside.”

What I’m leading up to is this…

I’ve discovered a textbook contrarian trade.  The kind Buffett and Soros would be proud of.  In fact, Soros jumped on this idea a few months ago when the shares were higher.

No doubt about it… you have a golden opportunity.

You can follow in the footsteps of the great George Soros.  And you can do it at a much lower cost.  There’s nothing better than getting the drop on an investing legend.

The company I’m talking about is Bridgepoint Education (BPI).

Bridgepoint is a for-profit provider of post-secondary education services.  They offer associate’s, bachelor’s, master’s, and doctoral degree programs in various fields.  They deliver programs online as well as at traditional campuses in Iowa and Colorado.

As of June 30th, the school had 67,744 students enrolled.

That’s 49% higher than the same time last year.  The recession has helped boost enrollments as many workers forgo a dismal job market in favor of career advancing degrees.

As you probably know, the for-profit education industry is under heavy fire from the government and investors.  A couple of my colleagues have written about it in previous DWR articles.

And the latest news in this saga is potentially catastrophic for most of these companies.

The U.S. Department of Education has proposed regulations that could severely limit federal student aid to certain for-profit schools.  This is very serious because for-profit schools generate about 80% of their revenue from federal student aid.

The DOE is concerned students at for-profit schools are taking on more debt than they can ever repay.  Of course, when students default on their loans, the taxpayers pick up the tab.  (I’m certainly not a fan of this arrangement.)

Under the proposed rules, schools can keep their federal student aid as long as two conditions are met.  Student-loan repayment rates are above 45%.  And student debt-to-income ratios are below 8% of total income.

The proposed rules are stringent to say the least.

A recent DOE analysis shows the vast majority of for-profit schools don’t meet the conditions.  Of course, this is devastating news for many of these companies.

However, four schools passed the test.

And one of them was Bridgepoint.

At a recent price of $13.72, the shares are trading at just 6.9x the 2010 estimate and 5.5x the 2011 estimate.  Those are extremely low P/Es for a company expected to grow earnings 29% a year over the next five years.

Clearly, the shares are pricing in the worst case scenario.

But the DOE analysis shows Bridgepoint is not going to lose their main revenue growth driver… federal student aid.  Once the smoke clears, investors are certain to drive these shares higher.

Take a page from the Buffett/Soros playbook…

Grab your shares of Bridgepoint now while the herd still hates them.  When the crowd turns bullish, you’ll be in perfect position to rake in the profits.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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