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Barel Karsan
Barel Karsan

For-Profit Education Stocks: A Basket Approach

March 27, 2013 | About:

As for-profit education stocks have continued to fall in the face of market strength, I have become more and more interested in this sector. But every company I've come across in this space seems to have a at least one risk I'm not comfortable with. For example, Career Education Corp (NASDAQ:CECO) is dirt cheap, but could face huge liabilities from a previous life. Corinthian Colleges (COCO) is also dirt cheap, but may have to seriously dilute its shareholders if a regulatory decision doesn't go its way.

As a result, I've decided to take a basket approach to this industry. Instead of picking one or two favourites, I've taken small positions in a few companies. If the industry is cheap (which I think it is), then the portfolio will probably do well even if a few falter. I would use this same approach if I was interested in the pharma space (because you don't know which company will come up with the successful drugs and which will fail) and financials (when discounts to book values are large across the industry, I couldn't tell you which banks are likely to fail and which aren't), for example.

Because many of the players in this industry have a lot of cash without a lot of debt, have beaten down valuations, and have single-digit P/E ratios despite big drops in revenue (while the cost-cutting has only just begun), I want exposure to for-profit education. I figured this was the lowest-risk way to do it.

Note that this only diversifies away company-specific risks. Overall risks, such as very stringent gainful employment regulations, will negatively affect all companies in this space. That's a risk one just has to take if one wants to benefit from the potential upside in this space.

Disclosure: Author has a long position in a few for-profit education companies

About the author:

Barel Karsan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.0/5 (9 votes)


Jsoumilas premium member - 4 years ago
Thank you for this article. I have actually taken positions in several of the Education companies. I believe this strategy makes a great deal of sense.
Junming82 - 4 years ago    Report SPAM
Thank you for the investment idea. I have been monitoring the sector and have believed that this sector is deeply undervalued though it does has a few challenges. I am invested in Apollo as some of the other gurus monitored here.


Disclaimer: This is not a buy or sell stock tip. Please do your own research.

Value investing blog: http://valuestocksinvesting.blogspot.sg/

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GuruFocus has detected 4 Warning Signs with Career Education Corp $CECO.
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