Apollo Group (APOL), the for-profit education stock behind the University of Phoenix, made waves yesterday by announcing that Phoenix’s accreditation was reaffirmed through the 2022–23 academic year.
Shares are set to rally this morning as a result, but they shouldn’t. Apollo Group stock still deserves a failing grade.
For-profit ed has been in trouble for a while. APOL stock is down 15% or so year-to-date in 2013 and off 77% since early 2009. Strayer University (STRA) is down 9% YTD and down 71% since early 2009.
But there have been signs of life elsewhere in the sector. Despite ugly long-term returns, both DeVry (DV) and ITT Educational Services (ESI) have rallied 50% and 40% respectively this year. DeVry soundly beat earnings expectations in February to spark a short squeeze and a nice gap up, though a revenue miss in April moved the stock back some. And ITT was trading for an earnings multiple as low as 2 earlier this year before sparking a big run of its own as investors stopped being so pessimistic.
I won’t dispute that some stocks here might have legs in the long-term, since helping Americans change careers or get technical training is a business that will never really go away. But of the for-profit education stocks out there, Apollo Group shouldn’t be on your list of ones to buy.
For starters, it’s telling that the news was sent out in an 8-K form — a formal SEC document that is required when news or other events could materially impact stock prices. Commonly, companies don’t file an 8-K if the news is thrilling … they do so to cover their behinds should the news wind up damaging shares down the line.
Take this great excerpt from the 8-K, and it makes more sense. The Higher Learning Commission, a regulatory body, “reaffirmed the accreditation of the University through the 2022-2023 academic year and placed the University on Notice status for a two-year period. Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components.”
In other words, APOL’s University of Phoenix has its accreditation, but are at serious risk of being in non-compliance in the near future now that they are on a watch list. That could result in painful sanctions.
Or as the 8-K says later: “We believe the imposition of the sanction of Notice on University of Phoenix could adversely impact our business.”
Maybe not so much a cause for celebration, eh, investors?
The regulatory environment is only going to get worse for education stocks out there like Apollo Group and Strayer. Reports that have found low graduation rates at for-profit colleges compared with peers, as well as aggressive marketing tactics resulting in big student loan payments subsidized by the government, haven’t sat well with the Obama administration.
There surely will be some good actors out there who win over students looking for a leg up in today’s competitive jobs market. But the fact that Apollo Group is on a watch list and has seen its stock continually gutted amid the rally in its peers is telling.
Don’t mess with Apollo Group stock after this accreditation news. Despite the rally, it’s actually news of another risk — not upside for the stock.
- Read the full 8-K here — it’s only about 500 words or so. (SEC.gov)
- A report showed for-profit education stocks graduated less than 1 in 4 students back in 2008. (Huffington Post)
- Should you mess with education stocks? Richard Saintvilus weighed in recently. (The Street)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.