Before You Invest in For-Profit Education

Double-digit dives in new student enrollment sent for-profit education stocks tumbling on Monday. Some stocks, like Strayer University (Nasdaq: STRA  ) , dropped over 25%. What is going on in this sector? Should investors bail before things get worse, or is this a buying opportunity?

Friday's announcement of the 20 percent enrollment drop in Strayer Education schools led Monday's sector-wise drop in for-profit education stocks. Although Apollo Group (Nasdaq: APOL  ) recovered on strong earnings, DeVry University (NYSE: DV  ) and other stocks like Career Education (Nasdaq: CECO  ) and Corinthian College (Nasdaq: COCO  ) are still well below the levels from last Friday.

The news of Strayer Education's 23% free-fall arrived on the heels of governmental threats of new federal regulations. Even worse, the drop in enrollment numbers directly opposed Strayer's previous predictions of a 13% enrollment increase. Investors reacted in an obvious fashion: dumping shares and reducing the value of Strayer by almost one-fourth of its previous market capitalization.

However, Strayer had a different perspective on the enrollment drop. Strayer's excuse for the enrollment drop was, quite simply, bad press. Chairman and Chief Executive Robert Silberman said, "Most of it is based on the fact you have important public policy commentators ... as well as significant media who have questioned the efficacy of investor-funded education." Nevermind the tuition increase or regulatory changes or competitors like StraighterLine that offer college for $99/month.

You heard correctly: $99/month. StraighterLine offers freshman and sophomore classes for $99/month. Compare that with the multi-thousand-dollar cost of education at Strayer, and maybe that might be another reason for the drop in student enrollment. Can we just face the possibility that college is too expensive, the government is not happy that colleges can earn large profits above-and-beyond students' tuition rates, and students are looking elsewhere for higher education?

On the other hand, for investors in for-profit colleges, not all is lost. Apollo Group, the owner of the most famous online college Phoenix University, warned last year that its enrollment numbers could decline by as much as 40% due to programs the company is commencing to improve its student base. Moreover, Monday's massive drops in stock value may also be premature. Both Apollo Group and DeVry University saw increases in their stock value on Tuesday, although Strayer Education dropped a few percentage points further.

Experts predict changes in government regulation for the sector, including stricter rules regarding debt and loan repayment. The landscape of the for-profit education industry is also changing. At the end of the day, perhaps the schools that can successfully adapt to the upcoming transformations may be the strongest players in the for-profit education market, if that market survives at all.

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