This article is part of our Rising Star Portfolios series. Follow all of Alex's trades on Twitter.
It's been scarcely six weeks since we initiated our for-profit education pairs trade, buying shares of Bridgepoint Education (NYSE: BPI ) and shorting shares of Strayer Education (Nasdaq: STRA ) . Bridgepoint is up 19%, while Strayer is down 19%, so we are making money on both sides of the trade. At today's prices, I'm no longer comfortable with the short side of our trade, so I'm going to -- pardon the boldface -- cover our short on Strayer Education and recommend that you do the same.
When we initiated our short on Strayer, the stock was priced for an unrealistically rosy future. In the initial trade alert, I wrote:
Strayer is priced for sunny days ahead. Today's price implies either 6% more students a year for a decade with today's recruiting costs, or 10% more students each year at industry-average marketing costs. Neither alternative is likely. When it comes to students, Strayer's already picked the low-hanging fruit. The company will have to either spend more to persuade prospects to pay its relatively high credit-hour prices, or settle for lower growth. Strayer isn't headed for the butcher's block, but I can't see the stock worth more than $125 a share, making today's $148 price quite rich.
At today's share price of $115, Strayer is now reasonably valued. As I wrote above, I don't believe this company is heading for the butcher's block. The risk-reward dynamic is no longer skewed in our favor, so I am going to lock in our profit on the short and move on.
What this means for Bridgepoint
With Strayer covered, the nature of our trade on Bridgepoint changes. Previously, we were betting that the valuations on Strayer and Bridgepoint would converge. In other words, we thought Strayer was overvalued and Bridgepoint was undervalued, and by shorting the former and buying the latter, we were making a bet on their valuations while removing the industry element. With our short on Strayer removed, we now have an unhedged directional bet on Bridgepoint.
Bridgepoint remains acutely undervalued. The company has been plagued by Congressional hearings, and, most recently, a subpoena from the New York attorney general. But even my most dire modeled scenario can't place a value on the shares below $29, and that can quickly turn into $39 in only moderate scenarios. Therefore, I am content with our now-unhedged position in Bridgepoint, and I might even consider adding to it once I more fully understand the subpoena situation.
Follow all of Alex's trades and market musings on Twitter.