October 16, 2012
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Investors were giving F's to Bridgepoint Education (NYSE: BPI ) on Tuesday as shares in the for-profit college fell as much as 14% after the Department of Justice announced an investigation into the educator's compensation for its admissions staff.
So what: This isn't the first red flag for Bridgepoint. In July, the Western Association of Schools and Colleges said the for-profit school spends more on recruiting students than actually teaching them, which resulted in the Association denying accreditation. Now, the DOJ's announcement comes on the heels of an audit by the Department of Education, and the company was forced to cut 450 jobs from its admissions department last month.
Now what: These sorts of allegations are far from unique in the for-profit education sector, as many of Bridgepoint's peers have also been accused of illegally compensating staff based on the number of students they enroll. I tend to avoid this sector for that reason, as well as its round-about, government-dependent business model. At a P/E of 3.8, this stock may look cheap, but beware of falling knives. Shares tumbled by more than 50% when accreditors began raising eyebrows in July, and clearly the collateral damage isn't done. Prospective investors would be wise to at least wait until the Justice Department completes its investigation before getting on board.
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