Thursday, February 5, 2009
(Cont'd from above)...

Jim (cont'd):

We don’t want to be the little piggy that gets caught at the top… and gives up all the profits… and so in tonight’s block… we are taking a look at one of our absolute favorite groups… and the markets most beloved group… and that is online education… and back by popular demand… we were drawn to this particular sell block by some of our technical friends… who have been emailing us telling us what new charts to look for… they say this group could be headed toward the slammer… now they don’t say that… what they do is they use a particular vernacular… that I am trying to teach you… that I am trying to learn myself… they say stocks look toppy… toppy… what is toppy you ask… is it some kind of child’s term like blankie… no, toppy is a piece of technical analysis jargon that chart watchers use to describe stocks that have run out of steam… where the buyers are exhausted and the stock looks like it is ready to come down after a big run… remember, we are not fundamentalists… think Benjamin Graham and Warren Buffet… rather than say the crusaders or the Bolsheviks… which means we like to look at the facts of the underlying business when we try to predict where a stock is going.. but we also know that lots of big money guys like to use the charts… and it is important to know what they are thinking… now I have to tell you, I have friends at places in mutual funds, maybe they are running your money… who would tell you that they are strictly based on the fundamentals… that all of their choices are made on the facts… but they wouldn’t make a move unless the chart blessed it… including some gigantic mutual fund companies that you and I both know.

So what is a toppy chart look like… I want you to take a look at Apollo Group… now this is the premier guy… this is the premier player… it is a great online education company… you might know it as the University of Phoenix online… according to Dan Fitzpatrick, who is our go to guy for technical analysis, and my colleague at TheStreet.com where he writes with me at the paid site RealMoney.com, remember I am chairman… technicians think a stock is looking toppy when they see what is called a double top… a stock that is trading higher makes two highs that look like the letter M… okay, got it… I know that using these pictagraphs can seem a little like looking at goat end trails to predict the future… but there is a lot of money out there that is being guided by the pictagraphs… so we have to give them their due… this is not Cramer at playing at Karnack the Magnificent… nor is it Cramer playing at Sir Edmond Hillary… let alone Tensie Norckay… but it does look to me… when I see these things that we are selling the Himalayas… because K2 is taller than Everest… that is not what they think.

Now, the first high end toppy chart is on heavy volume… this is big… lots of people buying and selling right here… but the second high is on much lighter volume… and can only get back as high as the first… or actually fail a little… remember, chart watchers look at volume as kind of a lie detector… kind of their Joe Friday… high volume means that a stocks move is telling the truth… low volume signals head fake… and this is exactly what we see… or they see in Apollo’s chart… they think this move back up is a head fake… technicians call this a flat top and to them it means that the aggressiveness of they buyers is no longer increasing… so the first peak is the real climax… and the second peak is from slower traders who tend to be last… the last people to find the stock and they also tend to have less money, so they can’t keep buying… the way that I like to look at this… I sometimes feel myself as a doctor, in the Dr. Phil mode… there is no Viagra when it comes to the charts… that is for certain.

Basically, the technical case against Apollo and other online education companies is that there is no one left to buy… the stock is too high for value investors… and the momentum buyers who were driving it up high… they are right now ringing the darn register… that is right… they are sell, sell, sell… the buyers are exhausted… that remind me, by the way, Terra Nitrogen Company, L.P. (TNH) our favorite fertilizer play… it is up a spectacular 39% since I recommended it back on November 3rd… has also reached a point where the technicians are telling me that the buyers are exhausted… that is according to Rick Van Sr., another chartist that we respect that used to run the Morgan Stanley part, now he is a colleague of mine at the TheStreet.com, and he has got his own charting service… if I were you I would sell some TNH… otherwise, again, I think you are being a pig… the technicians would put Apollo Group and the other online education names in the sell block because they see this toppy M shape pattern in the chart… but here is the problem… remember the M.

Here is the problem… this is where I quibble with the technical analysis… let’s say this stock were to go break out and go thru this level… lets say this stock then spiked to right here… hitting a higher high… then the technicians would tell you that the momentum is back… and Apollo is a buy again.. because the chart wouldn’t look toppy anymore… to me I wonder how a stock can be a sell at $85 and a buy at $90... to me that has got buy high, sell low written all over it… which is why I come back to the fundamentals.

Okay, so what do the fundamentals say… first fully online programs are expected to grow at a 15% clip… and will soon be equal to 12% of the post secondary student population… they are convenient, they are less expensive… but I think that is probably already in the stocks… investors have been flocking to these online education names as a hiding place as one of the few remaining growth trends out there… the whole last 6 months… I think the money has been made… in the last 12 months, I mean look at this… in the last 12 months a basket of these stocks… of 10 education stocks are up 22%… okay, 22%… the S&P 500 is down 36%… the Dow is down 34%… 8 out of 10 stocks in this basket have had their full year earnings estimates revised upward in the past 90 days… right now the average price to earnings multiple of our basket of 10 education stocks is 28.9... look at that… that is the essence of expensive… during the last recession at the beginning of this decade… the average multiple of these stocks is 30.4... so there are a lot of people that think there is room to run…but Apollo Group is trading at 24 time earnings… 5 year growth rate of 17... in the last recession it traded at 40 times earnings… so they keep thinking… fundamentalists keep thinking that we have room… but that was in 2003... when Apollo was growing faster and had less competition… the online education space has become much more competitive since then… we may be getting to a point where there is not that much upside left in the stock… that is my view.

Hey, what could go wrong in the online education business… this is actually a tough call because we didn’t see much… we don’t see much.. but there is some decline in corporate reimbursement… there is some insider selling… two days ago Lincoln Educational Services, fine company… filed a 5 million share … 5.5 million share common stock offering… of which 4.5 million shares are being sold by insiders… including the CEO… that puts a little chill in it… and in the month of January alone, 7 different directors at Apollo Group sold over a million shares priced between $83 and $89... now insiders sell for a lot of reasons… they don’t want to be greedy… but it does sure look like these guys are getting out while the getting is good… my inclination is to join them… look so maybe we won’t desert the whole space… we would still own American Public Education, Inc. (APEI), the online education company with over 80% of its student body either in military, or military related… that is a steady bus… it is up 6.7% since I recommended it on January 9th… it has got till March 10th till it reports… I would still buy it and sell the others as being too discovered and too exhausted… Corinthian Colleges (COCO), Career Education Corp. (CECO), ITT Educational Services Inc. (ESI), they are all up 20% this year… stocks have rallied more on pending relief… on funding overhangs rather than on clean growth… you know what… that is a register ringer.

Here is the bottom line…

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The Bottom Line!:     I think you should follow the insiders examples… at least take something off the table… and play with the houses money… do not sell everything like the technicians recommend where these online education stocks are concerned… we respect the markets ability to party long after you would have expect everyone to go home… but you know what… in the end… we would rather be early to the exit than the last ones on the dance floor… or to put it in another shorthand… no one ever got hurt taking a profit.

Charts & fundies accounted for, I think it’s time to sell the online education stocks...   Alright, here we go… school is out… we looked at the charts and the fundies for the sell block… and we think that it is time to take… some of the online education stocks… the hottest stocks in the market… off the table.

[verbatim recap]

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Jim went on after this segment to take questions from callers, and responded with his comments...

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Q:    What do you think of DeVry, Inc. (DV)? They look like a cash cow, I think they are past that department of justice thing, and they look strong.

Jim:    DeVry is another stock that has had just a fantastic run… that is another one of these terrific education stocks… it has got a little bit more going for it because it has got a lot of training programs that I like… at the same time it is up huge.. it is not as overextended to use the technical vocab, as I see Apollo… my temptation on the next big ramp up on DeVry, I want you to take some profits.

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Q:    How should we students be allocating any extra income we will come across with a new job...

Jim:    Here is one thing that I am going to say… it is real counter intuitive… no one is going to believe it… all the gray beards are going to say… no I do not want you to pay that down… that is low interest debt… let it run while you accumulate some capital… I think you ought to some investing… and take a little bit more of a long term flyer than we can… us older folks… I have been saying over a 4 year period I do not think that this market is going to do much… you have your whole life ahead of you… you can make some bets… let’s do some real good thinking… homework… big some big growth stock names… and you will do just fine… I don’t want you to pay down that debt… take a little bit of money each month and put that away.. after your first $10,000 which should be in an index fund… then you start picking stocks with your mad money.

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Q:    I see the proposed stimulus package has a lot of money going towards schools and education. Corinthian Colleges (COCO) just had their earnings and American Public Education, Inc. (APEI) has their earnings next month, both of these stocks never miss their earnings. Based on Obama’s plan, do you think we can still see a bounce on educational stock?

Jim:    Let’s… do you know what happens when you get to this point of the group… when they have all moved up… we become more selective… and we say hey we need more than just the group going higher… that is why I like this American Public Education, Inc. (APEI)… because it is early on its trajectory… and it has got that great military twist to it… that I think is going to produce… literally a decade worth of growth… let’s go with APEI… and let’s let the other stocks… well let’s just take profits.

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[verbatim recap]

[end of segment]

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