Friday, May 29, 2009
(Cont'd from above)...

Jim (cont'd):   


Jim:       We almost had a full-scale firefight yesterday, when two hedge fund titans, growth guru Steve Mandell, and noted short seller, Jim Chanos, came out with diametrically opposing views on the for-profit education stocks at a major conference with lots of Wall Street insiders. Frankly, I have to tell you... it's all anyone in the hedge fund community was talking about yesterday and today... You don't want to try to take sides here. Both of these guys are brilliant stock analysts, honest as the day is long, with deservedly great reputations.

You want to understand the two sides and try to thread the needle, so that neither one crushed you underfoot. And I think I have just the stock to do it with...

Bridgepoint Education, Inc. (BPI)!... The one that's a lot less likely to get torn to pieces by the short sellers, and the newest kid on the block... the profit education block.

But, as with any battleground, first you need to know the terrain...

What do growth investors like Steve Mandell see in these stocks?... Well, they like the enormous secular growth potential, which is why these stocks were so loved when everything else was falling apart during the bad old days... along with the fact that the group has stalled out lately... all the big for-profit education stocks are well off their highs... as people have been rotating into companies that do better when the economy gets better. That's why, for instance, we put all of them in the Sell Block a lot of points ago... Now, that hasn't changed the fundamental story, though, of the companies... which is there's tremendous demand for working adult, post-secondary education. And since the states are cutting budgets for state universities and community colleges, for-profit schools have become even more attractive. Let's face it, the tuitions for the on-line company schools are a bargain, compared to what I'm paying to send my daughter to college next year.

So, how come the bears are sharpening their claws for this group?...

Probably the argument that Jim Chenos made yesterday is that, just like the drug companies, the for-profit education businesses could soon be in the crosshairs of the Obama administration... because, just like healthcare, this business lives off of government spending! And, just like the drug companies, that spend three times more on advertising than R&D, the for-profit schools spend much of their revenue... most of their revenue... it's coming from the price you pay for the services... on advertising. 3% on average...

We know to fear the wrath of Obama... which is not unlike "The Wrath of Khan"... the best Star Trek movie so far... So, if for-profit education turns out to be like healthcare, then these stocks could be going even lower. The administration could totally pull the plug on this group, as 73% of the tuition at the four publicly-traded schools is coming from Feds in the form of government grants and student loans... Essentially, we're subsidizing the advertising campaigns of for-profit universities, letting the industry rake in a plump 27% operating margin.

I don't want to see Obama come after yet another industry... but, as I exist on this show only to lobby for your investments, 401(k), your IRA, and your 529... But, if he has to wreck another industry, I don't think I'd shed a tear for most of these for-profit schools. I say what they're spending our money on - buying students to beat the Street's earnings-per-share estimates - is scandalous, if not reprehensible...

Two things that are problematic, now that we have an administration that shockingly... and I always try to get my arms around this... an administration that believes in doing the right thing, and helping people...

Alright, that's the battlefield...

So what makes me think this fresh face IPO, Bridgepoint Education, is the way to win?...

First, unlike the rest of the group, the stock never had the tremendous rally... It wasn't even around until April, when these stocks had already fallen out of fashion... The last big IPO in education... was Grand Canyon Education in November. That gained 70% in just two months after coming public.

Bridgepoint, on the other hand, is up only $2 smackers from when it came public. It's primarily an online school, even though it owns two campuses, with 98% of students taking their classes over the web.

Most important, Bridgepoint is growing faster than some of its largest competitors, like APOL and STRA, the stock that Mandell used as his example, when he recommended the group at yesterday's conference.

Bridgepoint expects its student body to increase over 50% just in 2009. It's only at 14x earnings, even though the average multiple is 20x for this group... It should be able to grow earnings in the high-20s range next year. It's a steal versus the others, from the perspective of a growth manager. They might be willing to pay twice the current price for this stock.

And, unlike the rest of the group, Bridgepoint has some political insulation, in case the wrath of Obama descends on the for-profit education industry... or the wrath of the people, who don't like being ripped off...

Bridgepoint is just as dependent on government largesse as the rest of the group, so I'm sure that Chenos won't like it... 87% of the revenue from the larger of the two campuses is coming from the federal Title IV funds. But Bridgepoint prices are about 30% lower than its peers... in some cases, 50% lower... which should make the company much less of a target for short sellers and politicians. It seems like it's kind of a "buy one degree, get one degree" sale...

Bridgepoint's marketing costs take up just 35% of their revenues, down from 39% a year ago... well below industry average of 53%... so maybe they're not just buying students with the money. Operating margin, 15%. Nobody's going to tell this company it's too profitable.

This is the for-profit education stock that, at the very least, has a little Kevlar body armor protecting it from all the negatives Chenos highlighted.

Here's the bottom line...

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