For-Profit Education Stocks are in an Upcycle. And these are the Best of the Best.
There are two big reasons that you should consider investing in for-profit education stocks now.
Reason one is 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.
Reason two is that 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!
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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 didn’t deserve 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 at the best for-profit education stocks.
Which For-Profit Education Stocks Should You Buy?
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). I eliminated some of these, as well as a few that were too thinly traded or low-priced stocks.
As to the remaining 12 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, but in 2018, as the economy slowed, some schools experienced some serious slowdowns.
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.
Without further ado, here they are, in order from largest market capitalization to smallest.
The 12 Best For-Profit Education Stocks
TAL Education (TAL)
Beijing-based TAL serves 3.9 million K-12 students through 594 learning centers in 42 cities, providing language tutoring and test preparation services. Revenues have grown 40% or more for the past four years. The second quarter of 2019 saw revenues grow just 28% to $703 million while earnings fell (due to one-time factors) to $0.03 per share. TAL’s P/E ratio is 60. As I write, the stock is well below its high of June 2018, so no longer one of the market leaders.
New Oriental Education and Technology (EDU)
Also based in Beijing, New Oriental serves 36 million students through 87 schools and 994 education centers. It’s grown revenues more than 20% in each of the past three years. In the second quarter of 2019, revenues slowed to grow just 20% while earnings grew 9% to $0.60 per share. Its P/E is 41. The stock had a correction of 53% last year but has rallied back well and is now very close to breaking out to new highs.
Bright Horizons Family Solutions (BFAM)
Massachusetts-based Bright Horizons provides a range of services for small children, from employer-sponsored childcare and backup care to early education and pre-school. The company has more than 1,082 centers in 41 states and Canada (North America accounts for 76% of revenues) with additional centers in Europe, India and Puerto Rico. In the first quarter of 2019, revenues grew 8% to $502 million while earnings jumped 12% to $0.81 per share. The stock’s current P/E ratio is 347. As a slower-growing company, its stock has not been as hot as the first two in recent years, but it basically ignored the late-December correction and has been hitting new highs for most of 2019.
Grand Canyon Education (LOPE)
Founded in 1949, Grand Canyon Education is the company behind Grand Canyon University, a Christian university in Prescott, Arizona that serves 97,000 students, both onsite and online. Revenues in the first quarter of 2019 shrank 28%, but only because the company sold its physical campus and related assets to another company (now known as Grand Canyon University) in exchange for an initial 15-year deal that will give GCE 60% of GCU’s tuition and fee service revenue. In the quarter, earnings grew 7% to $1.62 per share. The stock has been one of the most stable uptrending stocks in the sector for years, and as I write it’s close to hitting new highs.
This California company was founded in 2005 as a textbook-rental company but over the past few years, it has transitioned to a purely digital company, and now provides study guides and textbooks (through a partnership with Ingram) to more than 5 million high school and college students. In the first quarter of 2019, revenues grew 27% to $97 million, while earnings jumped 50% to $0.15 per share. Reflecting the company’s bright future, the stock’s P/E ratio is 74. The stock has been strong since the digital transition was completed, and as I write it has been hitting new highs,
Strategic Education (STRA)
Previously known as Strayer Education (STRA) and based in Herndon, Virginia, this company merged with Capella Education of Minneapolis last August and adopted the new name as an umbrella—but kept the trading symbol and the names of the operating educational institutions. Aimed at working adult students, these institutions serve about 52,000 students across the U.S. In the first quarter of 2019, revenues spiked 112% (the merger) to $246 million, and earnings grew 35% to $1.66 per share. The stock’s P/E ratio is 37. STRA is trending up, and hitting new highs as I write.
GSX Techedu (GSX)
The youngest stock in the group, GSX just came public in June. Based in Beijing, the company is the third-largest after-school tutoring company in China. First-quarter 2019 revenues were $40 million, up 437% from the year before, while earnings were $0.02 per share. Analysts are looking for $0.18 this year and $0.20 in 2020. The stock’s chart is short, but the stock is hitting new highs. And the P/E ratio is 396—though “only” 66 on a forward basis.
Hailiang Education Group (HLG)
Hailiang Education is a division of Hailiang Group, a Chinese diversified conglomerate with $26 billion in revenue in 2017. Hailiang Education, relying on the bricks and mortar of the parent, runs an “asset-light” education company, providing K-12 education services to some 55,000 students through 23 schools. But its goal is to serve 150,000 students by September 2020 and more than 400,000 by September 2025! Information on the company is a bit thin, and financial statements tend to be less available than we’d like, but the trend of the stock was very impressive until June 2018. After that, following the rule that what was hottest becomes coldest—the stock dropped 66% to its February 2019 low, and since then it’s been working its way back. In the last quarter of 2018, revenues grew 23% to $47.5 million, while earnings per share grew 65%, to $0.38 per share. The P/E ratio is now 37.
Career Education (CECO)
Headquartered in Schaumberg, Illinois, Career Education operates American InterContinental University and Colorado Technical University, providing post-secondary education for some 35,000 students in campuses across the U.S., with programs in criminal justice, accounting, education, nursing and information technology—though business administration is by far the most popular focus. Management spent a couple of years cutting unprofitable programs, and now both revenues and earnings are growing again. In the first quarter of 2019, revenues grew 7% to $158 million, while earnings surged 40% to $0.35 per share. The P/E ratio is 19 and the stock is hitting new highs.
OneSmart International (ONE)
Providing K-12 tutoring to 77,000 students in China, OneSmart had its IPO back in late March, 2018, enjoyed a brief spike higher a month later, but then fell more than 50% and has been building a base in the 7-8 region since. But the business is growing! In the first quarter of 2019, revenues grew 35% to $141 million, while earnings were $0.06 per share, down 25% from the year before. The P/E is 25.
Based in Herndon, Virginia, K12 provides online curriculum to more than 104,000 K-12 students in 33 states, mainly in public schools that are under management contracts, but its revenues are only marginally higher than they were three years ago. In the first quarter of 2019, revenues grew 9% to $253 million, while earnings per share grew 38% to $0.44. The stock last hit a high in April and has corrected normally since.
Bright Scholar Educational Holdings (BEDU)
Bright Scholar is the largest operator of bilingual and international K-12 schools in China, with 60 schools in seven provinces serving 34,000 students—and continuing to grow by acquisition. In the second quarter of 2019, revenues grew 19% to $100 million, while earnings per share grew 12% to $0.19. However, the stock has been pulling back since peaking in late 2017, and now appears to be building a base between 9 and 10.
My Favorite For-Profit Education Stocks
The Chinese stocks were favored until mid-2018, as they had the advantage of great demographics and a faster-growing economy. But the picture has been more mixed since as the Chinese economy has slowed, so your best bet is to use the traditional tools: look for growing revenue and earnings combined with a strong chart.
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.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More
*This post has been updated from an original version.