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It's perhaps jarring to hear that one of last year's best-performing groups may also be one you'll want to sell soon. On the other hand, knowing the history of for-profit educational stocks might make an exit decision a little more understandable.
Last year, education stocks bullied the S&P 500, with an index of such companies gaining 9% for the calendar year, and rallying an average of 85% off their lows of last March 28. The S&P 500 lost 38% and 31% for the same time frames, respectively.
I attribute the oddity to accelerating unemployment in early 2008. Hundreds of thousands of previously employed folks were forced into a situation where they had no job, and needed to add some skills to what they offered a prospective employer.
But what will happen to education stocks when the economy stops bleeding -- and I believe we're starting to see some stanching of its wounds -- and unemployment starts to dwindle?
A surprising lesson
The last time we saw unemployment trending lower was between June 2003 and March 2007. We were also in the middle of a bull market then; the S&P 500 rallied more than 45% during that time.
During the same period, Apollo Group (Nasdaq: APOL ) sank 29% and Corinthian Colleges (Nasdaq: COCO ) lost 40%. DeVry (NYSE: DV ) earned some gains, but still trailed the market with a 26% gain. ITT Educational Services (NYSE: ESI ) was one of the rare educational stocks to make gain with a 178% for the time frame. That was roughly the success ratio for all the stocks in the group; one out of four isn't too impressive, though.
The lesson? Educational stocks may be better when owned in tough environments, as they can lag in a strengthening economy.
So what about now?
There's no guarantee that the lows of early March were the final turning point for the economy, but it was a point where we started seeing some more optimistic data. We also saw core retail sales, excluding motor vehicles and parts, rise in January and again in February. It was the first glimmer of hope in a long time.
More importantly, in the past two weeks, the S&P 500 Educational Services Index has lost almost 10%, while the market is up nearly 10%. Hmmm. Coincidence?
Contrary to today's gloomy outlooks, the economy will eventually get healthy again, and perhaps unexpectedly. Retail sales are an omen; falling educational stocks and a rising market are the symptom. If I'm right and we've really turned the economic corner, I think it's time to take sweet profits on educational stocks while there's still some profit left to take.