Value Trap In The For-Profit Education Industry

| January 11, 2011 | 0 Comments

When a former high flying stock has its price slashed, there’s always the temptation to buy.  The stock simply looks too cheap to pass up.

But beware the value trap…

Just because a stock has already seen a steep decline doesn’t mean it can’t continue to fall.  And if you’re only looking at the stock’s price and earnings, you could be fooled into falling for a value trap.

Right now there’s an entire industry that looks extremely cheap on the surface.  But in reality, it’s a bottomless pit that’s camouflaged with a few sticks and leafs.  It’s a value trap just waiting to snare unsuspecting investors looking for cheap stocks.

Fortunately, you’re going to be one of the lucky investors sidestepping disaster.

Let me explain…

The for-profit education industry is in deep trouble.  Companies like Apollo Group (APOL), Strayer Education (STRA), and Corinthian Colleges (COCO) have long been darlings of institutional investors.

And for good reason.  Back in their hay day, they were great growth stocks.

But over the last year, they’ve all been taken out to the woodshed.  APOL is down more than 40%, STRA is down more than 45%, and COCO is down 66%!

Whatever you do, don’t give into the temptation to buy these stocks because they’re cheap.  Simply put, these stocks are destined for the trash heap.  And you don’t want to own them at any price.

Remember, for-profit education stocks soared because the industry had huge profit margins and it was growing at a phenomenal pace.

Their growth was fueled by aggressive and misleading sales tactics.  And easy access to federal student loans and grants.

The problem is many students who signed up for classes failed to complete the program.  Or promises of big earnings didn’t pan out when they completed the program.

As a result, many of the students began to default on their federally backed student loans.  This caught the attention of lawmakers in Washington, DC earlier this year.  Apparently wasting taxpayer money is ok for Congress but it’s frowned upon when others do it…

Now a whole slew of regulations are coming down on the for-profit education industry.  And it’s completely derailed the growth that made the industry such a hot investment to begin with.

In fact, industry bellwether APOL just reported their most recent quarterly results.  The results are dismal.  The number of new students signing up for classes declined 42% from a year ago.

As of right now, I still haven’t seen a plan for them to start growing again.  And the truth is, I just don’t see how they ever will again.

Here’s where it gets tricky…

Thanks to deep cost cutting, APOL managed to beat analysts’ earnings estimates.  This has given investors hope management will be able to right the ship.

Don’t believe the hype.  For-profit education stocks are a value trap.

The writing is on the wall… New student enrollments are down 42% at the best run for-profit education company.  The others will likely fare much worse.  Save your money… Avoid this industry.  And sidestep this value trap!

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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