Learning How to Make Money in Education Stocks

Classroom with adult students

There’s never been a better time to invest in for-profit education

Now is the time to invest in for-profit education stocks, and there are two big reasons why. 

    Betsy DeVos, Donald Trump’s Secretary of Education and undoubtedly the most business-friendly person to hold the title since the Department of Education was created by Jimmy Carter in 1979. The entire sector of for-profit education stocks, which peaked in a huge bubble in 2010 and bottomed after a widespread collapse in 2013, is now in a healthy upcycle. But it hasn’t yet come anywhere close to “overheated,” so you can still make a lot of money!

That previous bubble, remember, was inspired by the mantra “Everyone Deserves a College Education” and fueled by billions of dollars in federal loans, which for-profit colleges happily steered to millions of students who might previously have never dreamed of going to college.

Trouble is, some of them wouldn’t have otherwise gotten a college education—either because they couldn’t do the work, or they couldn’t pay back their loans—and when the Feds wised up and cut back on the loans, the bubble collapsed.

In many ways, the bubble in for-profit education was similar to the one spurred by the mantra “Every American Deserves to Own a Home,” which fueled the growth of the subprime mortgage industry, whose implosion kicked off the Great Recession of 2008-2009.

Happily, the bursting of the bubble in for-profit education didn’t bring the same widespread damage.

But it did leave two of the most aggressive companies bankrupt and defunct (Corinthian Colleges in 2015 and ITT in 2016), while countless smaller institutions simply closed their doors. The most recent was Education Corporation of America, which in December 2018 closed its remaining 70 colleges after losing its accreditation.

The biggest of all, the University of Phoenix, didn’t die, but was taken private in 2017 at less than 12% of its peak market value. And in the final act of the implosion, hundreds of millions of dollars of loans have been forgiven by the federal government—the cost to be borne by the American taxpayer, me and you.

But now the sector is healthy again, so it’s time for a fresh look. In fact, there are more than 30 public companies trying to make a buck in the education business.

While most of these companies are running schools—both physical and online—the sector also includes companies supplying educational materials (programs and textbooks).

As to the remaining for-profit education stocks, it’s interesting that half are based in China and serve the Chinese market. In general, the Chinese for-profit education business has been booming in recent years.

The for-profit education industry in the U.S., meanwhile, though it has not enjoyed the rapid growth of the Chinese schools in recent years, is now looking stronger, with numerous stocks hitting new highs.

My favorites of the Chinese stocks are New Oriental Education (EDU), GSX Techedu (GSX) and Hailiang (HLG).

As for the U.S. for-profit education stocks, Strategic Education (STRA) has the power of a merger working for it, Grand Canyon Education (LOPE) boasts a pristine record of revenue and earnings growth as well as a healthy chart, Bright Horizons (BFAM) is slower but rock-solid, and Chegg (CHGG) has a great leadership position in the niche of educational resources.

As always, your best bet is to use the traditional tools: look for growing revenue and earnings combined with a strong chart.

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