Hedge Funds’ Favorite Education Stocks

Most education-related stocks, particularly for-profit education stocks, have been weighted by declining enrollment and increased regulatory scrutiny in recent years. For-profit education providers have been criticized for boosting enrollment in order to add to their top-line figures without taking into account student qualification. As a result, critics have been saying that numerous students graduate with massive amounts of debt and inadequate skills to find a job in a highly-competitive job market to pay back their debt. While this is one of the reasons investors might have been ignoring education-related stocks in recent years, one should bear in mind that individual companies and their individual stories may show different growth prospects. That’s why Insider Monkey decided to compile a list of five education stocks favored by the hedge funds tracked by our team.

At Insider Monkey, we track around 760 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5. TAL Education Group (ADR) (NYSE:XRS)

– Number of investors with long positions as of March 31: 19

– Aggregate value of investors’ holdings as of March 31: $336.06 Million

TAL Education Group (ADR) (NYSE:XRS) received more attention from the hedge funds monitored by Insider Monkey during the first quarter of 2016, as the number of funds invested in the company rose to 19 from 14 quarter-over-quarter. Similarly, the dollar value all those funds’ equity investments in TAL Education increased to $336.06 million from $323.24 million during the quarter. The provider of K-12 after-school tutoring services in China has seen its market value climb 18% since the beginning of 2016. The company’s student enrollments increased from 1.07 million at the end of February of 2014 to nearly 2.31 million at the end of February of this year. At the same time, TAL Education’s net revenue for the fiscal year ended February 29, 2016 reached $619.9 million, up from $313.9 million recorded for fiscal year that ended February 28, 2014. Tiger Global Management LLC, founded by Chase Coleman, owns 1.72 million American Depositary Shares of TAL Education Group (ADR) (NYSE:XRS) as of the end of March.

#4. New Oriental Education & Tech Grp (ADR) (NYSE:EDU)

– Number of investors with long positions as of March 31: 20

– Aggregate value of investors’ holdings as of March 31: $146.16 Million

New Oriental Education & Tech Grp (ADR) (NYSE:EDU) has also received some love from the mini hedge fund industry followed by the Insider Monkey team, with the number of asset managers from our system invested in the company climbing to 20 from 18 during the March quarter. Even so, the overall value of those asset managers’ positions in the largest provider of private educational services in China fell to $146.16 million from $189.89 million. The company’s net revenues increased from $959.9 million recorded for the fiscal year that ended May 31, 2013 to $1.25 billion for the fiscal year that ended May 31, 2015. New Oriental Education’s net revenues for the first nine months of fiscal 2016 were $1.08 billion, so the company will easily top its previous year’s top-line figure. Meanwhile, student enrollments in academic subjects tutoring and test preparation courses in the nine-month period grew by 23.4% year-over-year to nearly 2.61 million. The ADSs of this Chinese company are up 36% year-to-date. Thomas E. Claugus’ GMT Capital has 1.12 ADSs of New Oriental Education & Tech Grp (ADR) (NYSE:EDU) in its portfolio as of March 31.

#3. Graham Holdings Co (NYSE:GHC)

– Number of investors with long positions as of March 31: 20

– Aggregate value of investors’ holdings as of March 31: $631.62 Million

The number of hedge fund vehicles with long positions in Graham Holdings Co (NYSE:GHC) increased to 20 from 19 during the January-March quarter, while the overall value of their positions climbed to $631.62 million from $620.47 million quarter-over-quarter. The 20 asset managers invested in Graham amassed 23% of the company’s outstanding shares. The shares of the diversified education and media company have appreciated 4% since the start of 2016. In early 2016, the company’s Kaplan subsidiary, which provides educational services on a global basis, acquired a 100% interest in Mander Portman Woodward, a provider of bespoke education to students in London, Cambridge and Birmingham; as well as a 100% interest in Osborne Books, an educational publisher of learning resources for accounting qualifications in the United Kingdom. The total purchase price of the two acquisitions equaled $208.3 million. Mason Hawkins’ Southeastern Asset Management upped its stake in Graham Holdings Co (NYSE:GHC) by 4% during the first quarter to nearly 725,000 shares.

#2. Apollo Education Group Inc. (NASDAQ:APOL)

– Number of investors with long positions as of March 31: 22

– Aggregate value of investors’ holdings as of March 31: $178.53 Million

Apollo Education Group Inc. (NASDAQ:APOL) has lost some appeal among the hedge funds monitored by Insider Monkey, as the number of funds with stakes in the company decreased to 22 from 24 during the first quarter. Correspondingly, the aggregate value of their stakes fell to $178.53 million from $199.27 million quarter-over-quarter. Roughly 20% of Apollo’s total number of outstanding shares were stockpiled by the 22 hedge fund vehicles included in our database. Just recently, shareholders of private education provider Apollo Education Group approved a $1.14 billion sale that would hand the parent to the University of Phoenix over a consortium of three private investors, which includes funds affiliated with Apollo Global Management LLC (NYSE:APO), the Vistria Group LP and Najafi Companies LLC. At closing, Apollo Education Group shareholders will receive $10 per share in cash for each share owned. The new owners have not outlined their plans for the for-profit school just yet, but the new ownership structure will most likely transform the University of Phoenix. Donald Yacktman’s Yacktman Asset Management had 2.12 million shares of Apollo Education Group Inc. (NASDAQ:APOL) in its portfolio at the end of March.

#1. Houghton Mifflin Harcourt Co (NASDAQ:HMHC)

– Number of investors with long positions as of March 31: 22

– Aggregate value of investors’ holdings as of March 31: $848.20 Million

Houghton Mifflin Harcourt Co (NASDAQ:HMHC) also fell out of favor with the hedge funds monitored by Insider Monkey in the first quarter of 2016, during which the number of funds with equity holdings in HMHC fell to 22 from 26. What’s more, the overall value of those holdings decreased to $848.20 million from $928.95 million. The 22 smart money investors with stakes in HMHC accumulated almost 35% of the company’s outstanding common stock. The global learning company has seen its shares go down by 20% since the start of the year. Houghton Mifflin Harcourt’s net sales for the first three months of 2016 were $205.82 million, up from $162.67 million reported a year ago. The increase was mainly driven by the $37.0 million net sales impact from the acquisition of Scholastic Corporation’s Educational Technology and Services business in May 2015. Marc Lasry’s Avenue Capital trimmed its stake in Houghton Mifflin Harcourt Co (NASDAQ:HMHC) by 27% during the March quarter to 3.16 million shares.

Disclosure: None