Why it May be Time to Give Education Stocks Another Chance

Once a booming industry that was a darling on Wall Street, for-profit education has suffered an ignominious decline in recent years (at least in the U.S), exemplified by the collapse of both Corinthian Colleges and ITT Educational Services, two of the leading institutions in the U.S.

The scandals that engulfed both companies, which included allegations of fake job placements for students, phony enrolment and graduation statistics, and deceptive and predatory recruitment practices, ultimately lead to the demise of both companies after the Department of Education excluded their programs from receiving students which required federal loans, a death knell for both companies.

The cases sent shockwaves throughout the industry at large, which, when coupled with tightening government standards for loan issuance to prospective students, lead to for-profit enrolment declining precipitously between 2010 and 2016. Student enrolment at The University of Phoenix, run by Apollo Education Group Inc (NASDAQ:APOL), long the industry’s titan, imploded by 70% during that period, leading to a slew of campus closures and layoffs. Other institutions like DeVry University (now known as Adtalem Global Education Inc (NYSE:ATGE)), Career Education Corporation, and Hondros College also endured notable enrolment declines during the period.

Amid this backdrop, it’s not surprising that investors remain wary of the sector and the players still in it. While the U.S for-profit market is still somewhat stagnant, it has one major thing going for it, that being Education Secretary Betsy DeVos, a supporter of the for-profit industry who has worked to undo some of the regulations implemented during the Obama era that spurred the crackdowns on Corinthian and ITT. The result could be a revitalized for-profit industry where big opportunities will exist for aggressive companies to fill the void left behind by past closures and shutdowns.

On the following page we’ll take a look at three intriguing stocks in the for-profit education sector, which are Adtalem Global Education Inc (NYSE:ATGE), Chegg Inc (NYSE:CHGG), and Bright Horizons Family Solutions Inc (NYSE:BFAM).

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Adtalem Global Education Inc (NYSE:ATGE)

Adtalem Global Education Inc (NYSE:ATGE), formerly known as DeVry, has rebounded by 50% since the middle of 2017 and it appears that there’s more room yet to run for the stock. Enrollments have improved after the recent struggles mentioned on the previous page, as have margins, which are helping to jumpstart earnings growth despite modest revenue growth (1% in the fourth-quarter, which was the company’s fiscal 2018 second-quarter). 10.9% revenue gains in the Professional Education division during the fourth-quarter helped offset 10.5% declines in the company’s Traditional Education division.

At the end of 2017, Adtalem Global Education Inc (NYSE:ATGE) was held by 20 of the hedge funds in our database, a decline of five quarter-over-quarter. Those funds owned 10.5% of Adtalem’s shares, valued at over $267 million. Cliff Asness‘ AQR Capital Management owned 1.10 million Adtalem shares on December 31, an increase of 167,211 shares over the fourth-quarter.

Grand Canyon Education Inc (NASDAQ:LOPE)

Grand Canyon Education Inc (NASDAQ:LOPE) is on a roll in 2018, gaining over 20% this year on the heels of massive gains in the second-half of 2017. Enrollments at the post-secondary education facility increased by 10.2% in 2017, which included a 10.5% increase for online enrollments, while revenue and income growth were even stronger at 19.1% and 42.3% respectively. The company’s free cash flow rose sharply in 2017, while operating margin also improved by 2.4 percentage points to 33.7%.

Grand Canyon Education Inc (NASDAQ:LOPE) was owned by 23 of the hedge funds that we track on December 31, up from 21 a quarter earlier. George Hall‘s Clinton Group was one of the funds to open a new position in the stock during the fourth-quarter, buying 61,482 shares worth $5.5 million at the time.

Chegg Inc (NYSE:CHGG)

Chegg Inc (NYSE:CHGG), a provider of textbooks and other learning materials and study aids, has transformed to a purely digital platform that should allow it to rapidly accelerate growth in the coming years, with an addressable market that could stretch to 30 million or more. A key component of Chegg’s future success will be its ability to raise its revenue per subscriber, as the company’s capex margin is currently a high 10% of sales. Chegg grew revenue by 17% to $73.5 million in the fourth-quarter.

Richard Driehaus‘ Driehaus Capital was one of 15 hedge funds tracked by Insider Monkey that owned shares of Chegg Inc (NYSE:CHGG) at the end of 2017. Those 15 funds owned 12% of the company’s shares heading into 2018, valued at $213 million.

Disclosure: None