Could be that math is not their strong suit.
Separate probes into alleged accounting improprieties at Corinthian Colleges (Nasdaq: COCO) and Career Education (Nasdaq: CECO) have caused the entire for-profit sector to flunk. Despite reporting impressive earnings yesterday, University of Phoenix (Nasdaq: UOPX) and Apollo Group (Nasdaq: APOL) also took a hit.
The Department of Education reported "significant findings of non-compliance" with federal loan regulations at one campus of the 150-campus Corinthian College. As a result, they revoked the school's ability to receive advance student loan payments, the equivalent of getting detention. Allegedly, school officials at the Bryman College campus in San Jose, Calif., helped students falsify loan documents in order to obtain higher grants. Perhaps it was a portent of things to come when its president and chief operating officer jumped ship in April.
Meanwhile, Career Education, which operates 75 campuses with 83,000 students, had its informal SEC inquiry upgraded to a formal one. The agency will be looking into whether the educational services company falsified its enrollment records and some financial data. Last week, Career Education got held back a grade as it was hit with a shareholder class-action lawsuit claiming the company falsified student records.
In February, ITT Educational Services (NYSE: ESI) faced expulsion as it had its offices and 10 campuses raided by the FBI -- the FBI! --because of the way the company calculates graduation rates, grades, admissions, and salaries of graduates.
The uncertainty surrounding the sector, including the ruler-across-the-knuckles given by the Education Department to Corinthian, has investors spooked. Despite a few bright spots, the sector has been ailing for a while, though.
University of Phoenix posted an increase in per share earnings of more than 75%, but still saw its stock tank by 5%. The school earned $0.48 per share in the third quarter, compared to $0.27 last year. And Apollo saw its stock also fall by 5% despite its forecast of full-year earnings of $1.55 per share versus a consensus estimate of $1.48. However, it did say future enrollments may be less than anticipated.
Shares of rivals DeVry (NYSE: DV) and Strayer Education (Nasdaq: STRA) also fell in the wake of the widening probes.
It's not the first time the industry has come under scrutiny, though it has emerged intact and profitable. Indeed, for-profit, post-secondary schools have been among the market's leading performers over the past five years.
Yet as investigations swirl and charges of impropriety fly, investors may just want to take a page from the school system and sit out the summer.
Fool contributor Rich Duprey fondly remembers his third-grade teacher Mrs. Zeman. He does not own any stocks mentioned in this article.
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