One Mini-Bubble Still Intact (Updated)

Feb

[Updated: 6:45 AM, Feb 5]

Yesterday, after the market close, Barron’s Online had a damning article (Do Apollo Group Investors Need an Education?)on APOL which pretty much reinforces what I and the articles I have linked to have said. Excerpts:

The federal funding that backs Apollo’s student loans has been called into question because of high dropout rates and default rates among its candidates for associate degrees. And investor attention has recently shifted to newcomer Grand Canyon Education (LOPE), which went public back in November.

..

Certainly Apollo Group Executive Chairman John Sperling seems to believe the time is ripe to realize some gains. As Barrons.com reported on Jan. 26, Sperling and his son sold $71 million in stock from Jan. 15 to Jan. 22, on top of a previously planned $89 million stock sale. Sperling and son continue to own a combined 18% of the company’s shares. (See Inside Scoop, “Education Execs Raise Degree of Selling,” Jan. 26, 2009.) Mohan’s note: I didn’t read this article, but I am heartened to note that Barron’s also came-up with a variation of my opinion on these “degree sellers.”

…

Nevertheless, there are enough very simple reasons to stay away from for-profit education stocks in general, and Apollo in particular, after their strong run.

For one thing, the Obama administration may not be as favorable to for-profit educational outfits as the Bush White House was. The previous executive branch was widely regarded as friendly to efforts at private education, and a former Apollo Group lobbyist, Sally Stroup, was assistant secretary for postsecondary education from 2002 to 2006.

President Obama, by contrast, has demonstrated more of an interest in making federal aid available for community college education and on improving early education.

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[The article has been illegally copied on Yahoo Boards. Part 1; and Part 2]

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Original post

On this board or in my replies to Intraday Trading blog I have occasionally mentioned about one last standing bubble sector in stocks: degree sellers, namely Devry, Strayer and Apollo Group. OK, you can throw in ITT Technical Institute here also, but they are in the business of vocational training, not selling degrees.

(FYI: being an educator myself, I cannot bring myself to call them education companies. I think they are in the business of selling worthless piece of paper, and call it a degree, to some of the most vulnerable and the gullible).

Since the shakeout in October, this sector has been performing strong. STRA, APOL are close to 52 week highs. DV just cracked. I have read reports that cash-flow at DV is weak and APOL is facing a major law suit which accused them of ‘fraud’ (a la EVCI Career Colleges , which went from over 100 in 2001 to 0 last year.)

I reserve judgment on the three “college” stocks. But, I think that the time to short these three may be NOW. Well, the insiders think so – they are literally dumping their shares of these three companies.

Why duplicate the effort in two most compelling and credible analytical articles I read on this subject?

From Seeking Alpha: Even with Aggressive Valuation, For-Profit Education Stocks Seem Overvalued
From Citron Research: Citron Releases the Document that The Apollo Group (NASDAQ:APOL) Does Not Want You or the US Government to See.
Again from Citron Research: Citron Comments on Apollo Part 2 – Revenge of the Analysts

Charts of APOL, STRA, ESI and DV look either toppy or broken. In addition to insider selling, aggressive call selling and put buying has picked up on APOL, DV and STRA. In the past I made good money on APOL puts. I don’t have any position on them now. I have DV in my cross-hairs for buying puts tomorrow.

3min says:

February 2, 2009 at 8:33 pm

Oh Mohan, You are truly the bearish of them all and, as before, I hope your over zealous nature and lack of timing does cost you money.

When the crushed middle class has lost their jobs, they run to quick and lower cost education for a worthy use of time. You can not deny the uptrend since October. Sure, the PE’s are high but I am more bullish than ever on these stock.

I will be long when you buy puts……but then again….I am in an out everyday, so my wallet does not suffer from my mid or long term opinion anymore.

I think a deeper analysis of this sector might be to study what happened in the second week of January to them….and plan accordingly.

Mohan replied:
February 2nd, 2009 at 9:41 pm

These colleges are not cheap. I had to counsel a student from one of these colleges. She spent a lot of money for credits that are worthless. I am in this field and I know what I am talking about.

I am thoroughly convinced that there is very little to no value in the degrees they give. If they are committing fraud to recruit students, maintain accreditation for student loans, they should go out of business – SOONER, not later – to protect the innocent.

“I hope your over zealous nature and lack of timing does cost you money. ” Thanks for the wishes. I wish you similar kind of luck with your investments/trades too.

3min replied:
February 2nd, 2009 at 10:20 pm

All in fun

bt310 says:

February 2, 2009 at 10:44 pm

Good analysis, Mohan. Jim Chanos has also stated that these schools offer little value added above community colleges. He has been great with his short calls(ie. Enron) and believes the student loan default rates will rise. The pop these stocks have received from Obama’s stimulus plan is overdone, IMO. One does not decide to take on over $100,000 in debt because of a $500 or $2,000 government subsidy.
This group is also the last of the IBD momentum trades. All others have fallen substantially from their highs. If we have another few washout days those puts should do very well.

February 2, 2009 at 10:46 pm

Mohan replied:
February 2nd, 2009 at 10:59 pm

Read that Citron Research report on Univ of Phoenix in full. It is very thorough and damning to APOL. Of course, we won’t know if the time to short is NOW or later. If Dept of Education does sue or take action on Title IV accreditation, APOL could drop like a rock to teens in a couple of days. Upside is very limited, as indicated by heavy insider selling.

If one has to value Harvard at the same valuation as APOL, it would be worth some $5 Trillion

Richard (permabear) says:

February 3, 2009 at 2:12 am

Thanks Mohan,

every bad business should be punished…especially the shareholders who support it

you are very right about timing. if you are going to short anything.. you better do it in the next few days if not tomorrow morning. we had our little coil fest and its time for the market to move. and this chart shows the entry is from above so the exit will be below.

http://social.stocktock.com/photo/spx-feb-2

momoney says:

February 3, 2009 at 4:40 am

Mohan,
Speaking of Tops look at AZO, I think logic is people will not buy new cars so they will spend more fixing there existing ones. But look at the finanicals for AZO, I got this from Yahoo Finance. Yet stock is near 52 week high.
Total Cash (mrq): 85.76M
Total Cash Per Share (mrq): 1.492
Total Debt (mrq): 2.27B
Total Debt/Equity (mrq): 37.805
Current Ratio (mrq): 0.974
Book Value Per Share (mrq): 1.044

HardTimes replied:
February 3rd, 2009 at 10:02 am

I thought the exact same thing a few months ago but was very surprised to not see them do well. The fact that people are driving less is what I didn’t take into account.

FLguy says:

February 3, 2009 at 8:12 am

Zig zag zig zag. Prelude to a fall. Will enter upon a bump up (may come pre-market), drifting into a 2-3:00 fall to 805. No time to watch screens today. Day job calls. Will work some bracket trades to enter puts on XHB, UA, AAPL, WYNN, UYG. Enjoy the day.