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Time to Kick School Stocks Out of Class

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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.

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James Brumley doesn't own any of the companies mentioned above, but he and the rest of Fooldom always abide by the Motley Fool's disclosure rules.

Read/Post Comments (4) | Recommend This Article (9)

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  • Report this Comment On March 19, 2009, at 10:56 AM, edav38 wrote:

    This article shows a Total LACK of Economic Principles and what happens in Economic Downturns similar or less so than the one we are in now.

    Education, is economic downturns, in all cases, Increases. This is a Historical FACT.

    To say that the for-profit Education industry is Too Shaky to invest in right now, shows a total Lack of intelligence about the industry, Regardless of past performance.

  • Report this Comment On March 19, 2009, at 12:20 PM, jbrumley wrote:

    Hi edav38. Thanks for the feedback, even if in disagreement.

    I just want to add a little clarity to the may well be a fact that 'education increases' in all scenarios. I don't know what you mean, as you didn't say if this means revenue, enrollment, or some other measure. What exactly do you mean? Where do you get your verifiable information? I'm not doubting it - I'm just saying let's get specific (since ambiguity is why most investors lose money) so we can really develop the conversation.

    That said, I hope I didn't come across as trying to imply that education stocks are shaky right now. They're not - that's the key point. Too many investors wait for a stock or industry to get shaky though, and end up taking huge losses because of their patience. It's better to sell into strength than sell into weakness. That's my point.

    On that note, however, you may want to go back and read the middle part of the article again.... the whole reason I'm advocating selling these stocks now is not because I think the economy is going to get worse. I think it's going to get better. Education probably does increase in an economic downturn. If that's true though, then odds are good that it decreases when the economy improves.... as I think it will.

    It's a bit of a departure for a 'fool' to be this proactive about taking profits. And, it's a bit unusual for any industry journalist to actually acknowledge that the economy and market are cyclical (they all seem to think the current trend will last indefinitely). I think we all know better though... things have to improve sometime. I think that time is upon us. That's all.

    Am I certain? No, but like I said in the story, some of the economic stats are starting to look considerably better.

    And according to history, educational stocks do indeed struggle when the economy is strengthening and unemployment is sinking.

    What's everybody else think? Chime in below, as I think this could make for an interesting debate.

  • Report this Comment On March 23, 2009, at 11:35 PM, zorinj wrote:

    I just watched on CBS NEWS today, there is an increase in students (full house) for funeral director course. If that is the case I am sure every stock this sector will be doing good in terms of business.

    One quick note is there is already an 18% sort interest on this stock. One good result and it can get a 20-25% bump right there on short covering.

    Maybe that is when I will think of selling my shares.

  • Report this Comment On March 24, 2009, at 8:04 PM, jbrumley wrote:

    Thanks zorinj - interesting point. I saw that short interest too, and I think that's one of the bigger pitfalls I/we face in the short run.

    I wonder why funeral directorship become so interesting of late. It's not a bad choice, though it doesn't seem to (usually) be a beneficiary of a recession. I'll see if I can find it in the CBS archives.

    I still think - longer-term - that these stocks are poised to suffer when the economy regroups, which still looks close (to me). I can't short or buy any of these stocks now that I've talked about them, but if I could I'd be selling at short-term tops as well.

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