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!
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.
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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 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.
As to the remaining 18 for-profit education stocks, it’s interesting that eight are based in China and serve the Chinese market. The Chinese for-profit education business is booming.
The for-profit education industry in the U.S., even though it has generally recovered from the most difficult period, is simply not as strong.
Without further ado, here they are, in order from largest market capitalization to smallest.
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. The third quarter of 2018 saw revenues surge 54% to $700 million and earnings jump 33% to $0.16 per share. The company pays a dividend of 0.3%. TAL’s P/E ratio is 52. As I write, the stock has completed a pullback of 55% (the Chinese stock market has had a big and well-deserved correction) so this may a fine entry point for long-term investors.
New Oriental Education and Technology (EDU)
Also based in Beijing, New Oriental serves 36 million students through 87 schools and 994 education centers. In the third quarter of 2018, revenues grew 30% to $860 million, while earnings grew 14% to $1.16 per share. Its P/E is 24, which seems reasonable. The stock has just completed a correction of 53% so the stock is also at a good entry point for long-term investors.
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 1,038 centers in 42 states and Canada (North America accounts for 78% of revenues) with additional centers in Europe, India and Puerto Rico. In the third quarter of 2018, revenues grew 9% to $472 million while earnings jumped 18% to $0.73 per share. The stock’s current P/E ratio is 38. As a slower-growing company, its stock has not been as hot as the first two in recent years, so in the recent market correction, it was rock-solid; in fact, it recently hit a new high!
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 90,000 students, both onsite and online. Revenues in the third quarter of 2018 shrank 34%, 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 29% to $1.06 per share. The stock has been one of the most stable uptrending stocks in the sector for years, and as I write it’s on a normal pullback.
Kroton Educacional ADR (KROTY)
This Brazilian company with more than 50 years of experience behind it now operates in the primary, secondary and post-secondary markets, serving nearly one million students from 128 campuses in 17 Brazilian states. But the troubles in Brazil have been impacting the company. In 2017, revenues fell 2%, and in the third quarter of 2018, revenues shrank 25% to $313 million, while earnings declined 30% to $0.07 per share. The P/E is now 7. As for the chart, KROTY has been building a bottom between 2.2 and 2.5 since June.
Laureate Education (LAUR)
Based in Baltimore, Laureate provides undergraduate and graduate education to over a million students from more than 200 campus-based and online universities in 20 countries (down from 28 at its peak). But growth has been difficult to come by in recent years—and the company restructured in early 2017. In the third quarter of 2018, revenues fell 20% to $787 million, while the company lost $0.18 share, up from a loss of $1.02 the year before. The stock is flat.
This California company was founded in 2005 as a textbook-rental company but over the past two years, it has transitioned to a purely digital company, and now provides study guides and textbooks (through a partnership with Ingram) to more than 2.2 million high school and college students. In the third quarter of 2018, revenues grew 19% to $74 million, while earnings jumped 600% to $0.07 per share. Reflecting the company’s bright future, the stock’s P/E ratio is 67. The stock has been strong since the digital transition was completed, and as I write has just completed a normal 31% pullback.
Adtalem Global Education (ATGE)
Previously known as Devry, which paid a $100 million fine in 2016, Adtalem provides post-secondary education across the U.S. through a number of institutions, including, American University of the Caribbean School of Medicine, Chamberlain University, Ross University School of Veterinary Medicine and the Association of Certified Anti-Money Laundering Specialists. In the third quarter of 2018, revenues shrank 3% to $284 million, while earnings grew 10% to $0.45 per share. The P/E is 19. The stock has been strong since mid-2016 and hit new highs recently.
Strategic Education (STRA)
Previously known as Strayer Education (STRA) and based in Herndon, Virginia, this company merged with Capella Education of Minneapolis in 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 86,000 students across the U.S. In the third quarter of 2018, revenues grew 48% (the merger) to $161 million, and earnings surged 171% to $0.92 per share. The stock is trending up, and hit new highs in November.
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 21,000 students in Zhuji city in the province of Zhejiang. 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, but trends (particularly the trend of the stock) had been impressive until June, when the stock peaked at 89. Since then, it’s corrected 44%. There has been no third-quarter report yet, which is probably not a problem. In the second quarter, revenues grew 40% to $50.3 million, while earnings per share grew 29%, to $0.44 per share.
Providing K-12 tutoring to 77,000 students in China, Onesmart had its IPO back in late March. In the third quarter of 2018, revenues grew 42% to $137 million, while earnings grew 11% to $0.10 per share. The stock peaked at 16 in June and has corrected 56% since then.
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 first quarter of 2018, revenues grew 31% to $51 million, and the loss was two cents per share, down from a profit of a penny the year before. The stock, which came public in May 2017, peaked at 28 last September, bottomed at 12 in April, and is now working to confirm that the bottom has passed.
K12 provides online curriculum to more than 100,000 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 third quarter of 2018, revenues grew 10% while the loss was $0.22 compared to a loss of $0.21 the year before. The report was very well received by investors, who bid the stock up from 17 to 24. Since then, it’s been building a base around 23.
Career Education (CECO)
Headquartered in Schaumberg, Illinois, Career Education provides post-secondary education for some 35,000 students in campuses across the U.S., with programs in health, design, culinary arts and information technology. Management has been busy in recent years, cutting unprofitable programs, and the result is that although revenues have been shrinking, earnings are booming. In the third quarter of 2018, revenues were flat at $146 million, while earnings surged 127% to $0.25 per share. The stock peaked at 19 in July and has just corrected 34%.
Sunlands Online Education Group (STG)
Here’s another Chinese company that came public near the top. Sunlands serves more than 660,000 students across China, offering post-secondary and professional education. In the third quarter, revenues grew 89%, while the loss was $0.19 per share, compared to a loss of $0.14 the year before. The stock peaked at 14 in its very first week and is now down 77%.
Puxin Limited (NEW)
Puxin is similar to Onesmart, Puxin is another after-school tutoring company; in the third quarter of 2018, revenues grew 55% to $97 million, while the company lost nine cents per share. The company came public right at the market top in June and has corrected a massive 86% since then!
American Public Education (APEI)
Based in Charles Town, West Virginia, American Public Education offers post-secondary education to 83,000 students through American Public University, American Military University (AMU) and Hondros College of Nursing. Thirty-seven percent of revenues come from the Department of Defense. Growth has not been in double-digits since 2012, and there were several years with flat-out shrinkage, but there has been improvement lately; in the third quarter, revenues were flat while earnings grew 22% to $0.33 per share. The stock has recently corrected 39% and is now working to build a base.
Rise Education (REDU)
Founded in 2007 as a joint venture with Houghton Mifflin Harcourt Group, Rise Education teaches English to Chinese students in after-school and tutoring programs, and at the end of the third quarter operated 259 learning centers (roughly one-third franchised) in 85 Chinese cities. (RISE is an anagram for Riverdeep Immersion Subject English.) In the third quarter of 2018, revenues grew 29% to $50.5 million, while earnings grew 13% to $0.09 per share. As for the stock, it came public in October 2017 at 14.50, peaked at 18.6 in March, and has now corrected 61% as the Chinese market imploded.
My Favorite For-Profit Education Stocks
The Chinese companies have an advantage in this group, great demographics and a faster-growing economy. But the Chinese stock market has been terrible through the second half of 2018, which is good in that it has created bargains, but bad in that we can’t conclusively say that we’ve seen the bottom yet.
My favorite of the Chinese stocks is TAL Education (TAL), but New Oriental Education (EDU) is a close second. Hailiang (HLG) is smaller, hotter and riskier if that’s your style.
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, while Bright Horizons (BFAM) is slower but rock-solid.
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.