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Stock Screen: Worst Performing Stocks October 25, 2010
Usually a beaten down stock is in the Wall Street “dog house” for a really good reason. The reasons tend to vary drastically by company, but generally reflect investor concern that something isn’t going as well as planned. But, being today’s pariah doesn’t mean you can’t be tomorrow’s darling. In fact, if you take the time to sort through the companies that have been beaten down, it is possible to find a few that may be receiving an unfair drubbing because of short-term concerns that will likely be outweighed by long-term prospects.
To find those hidden gems, we took the stocks with the worst price performance over the trailing 13 weeks and searched for companies that may have the potential to, once again, gain the market’s favor. The news surrounding regulation in the for-profit education space has left virtually all of the companies Value Line covers in that industry on the “worst performer” list. Corinthian Colleges (COCO), Strayer Education (STRA), ITT Education (ESI), DeVry (DV), Learning Tree International (LTRE), Career Education (CECO), and Apollo Group (APOL) all have varying prospects but are, by and large, being tarred with the same brush.
Throwing the baby out with the bathwater isn’t uncommon on Wall Street and, in this case, the reason for the negative attitude is understandable. Indeed, prospects for The Educational Services Industry have been hurt by what Value Line analyst Iason Delavagas calls one of the worst media blitzes that the industry has faced in recent history.
The big issue is the mid-June U.S. Education Department order that proposes an array of rule changes governing the for-profit education industry. The proposed legislation takes aim at recruiting, marketing, and other practices at the for-profit education firms. Essentially, the rules could severely crimp these companies’ ability to acquire new students and, perhaps more importantly, help students get government aid to pay for their educations. Moreover, Iason states that the proposed changes will likely lead to higher regulatory compliance costs, which should pressure margins and bottom lines across the board, even if there is no impact on enrollment. Litigation from consumers and investors isn’t out of the question, either.
In this environment, is there any reason to invest in a for-profit education company? With unemployment at high levels, and likely to remain so for an extended period of time, people seeking educational opportunities are likely to remain at elevated levels. From a more fundamental point of view, Career Education, DeVry, Learning Tree International, and Strayer Education all have little or no debt on their balance sheets. This should provide the companies with ample wiggle room should they need to alter their business practices. The capital structures for Apollo Group, ITT Educational Services, and Corinthian Colleges, meanwhile, are comprised of 10%, 31%, and 50% debt, respectively. Clearly heavy debt burdens are not a good thing when the market is in such a volatile state—Apollo Group’s debt level is only “heavy” on a relative basis because the other companies have so little debt.
All of the companies mentioned have current ratios above one, indicating that they could pay off their current bills with their current assets if the need arose. Moreover, Apollo Group, ITT Education, Career Education, DeVry, and Corinthian Colleges all have material cash hordes. In the case of Apollo, it has over two times as much cash as debt. Strayer and DeVry both pay dividends that appear safe. Although DeVry’s dividend is merely a token, Strayer’s payout amounts to an over 2% yield.
Looking at the companies more closely from a business perspective, it appears that Strayer Education, DeVry, and Career Education are the best positioned. They will all likely be impacted by pending industry changes, but they continue to post solid results and the proposed regulatory changes appear likely to have the least impact on these three companies. ITT Educational Services seems well positioned as well, but, as noted above, has a higher debt burden to service.
Apollo Group, Learning Tree International, and Corinthian Colleges, however, are all likely to be hit harder than their peers by any pending regulation. Although all three should be able to survive the changes, the amount of time required to shift their business models could be longer. As such, these companies are only appropriate for very aggressive investors.
There is reason to remain positive over the longer term about the for-profit education space. Although there are a few companies here that are best left to the venturesome, others are appropriate for those with a lesser appetite for risk. Still, these are aggressive investment candidates right now as their residence on the list of worst performing highlights. Those interested in any of the for-profit education companies should spend some time reading Value Line’s individual reports to get a better understanding of how each is positioned in the current tumultuous environment.
This screen, the top performing stocks over the last 13 weeks, and many others are updated each week in the Index section of The Value Line Investment Survey.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.