Don't Look a Gift Horse in the Mouth

If the market gives me a 25% gift, I'm not going to turn it down again.

Apr 11, 2014 at 9:35AM

Bridgepoint Edcuation (NYSE:BPI) is one of the three losing positions -- of the 19 currently held -- in my Messed-Up Expectations portfolio, the real money portfolio I run on behalf of The Motley Fool. I purchased it twice in mid-2011 at around $22 per share, and then suffered through the massive drop in price to below $10 about a year later. By late 2013, it had clawed back up to near my purchase price, but its recent earnings release for 2013's fourth quarter has put paid to that. At least in the short term.

The company was hurt in 2012, thanks to accreditation issues, especially at Ashford University, one of Bridgepoint's two brands. Those were resolved in 2013 and the agency, Western Association of Schools and Colleges, granted accreditation to the university last summer.

Unlike the price drop in 2012, the recent share price drop was for a more prosaic reason: The company missed earnings estimates. Well, that and the fact that total student enrollment had declined by 22% year over year. Plus, you could probably add management's less-than-stunning guidance for 2014, and here we are with shares down about 25% from their February high.

It's actually not as bad as the surface numbers make it appear. It reported a loss of $0.12 per share when analysts were expecting a break-even level. Most of that loss, $0.10 of it, was due to a one-time legal accrual charge, so that much should be ignored (as long as it doesn't become a regular thing); but the company still ended with a loss. On the other hand, new student enrollment was up for the quarter, by 10%.

The company's not about to go bankrupt anytime soon, however, despite the disappointing Q4 results. For one thing, over half of its market cap is sitting in cash and investments, and it has no debt. For another, it's continuing to improve its marketing, targeting potential students who are more likely to graduate and find jobs, something the administration is concerned about. Rebranding Ashford University's business school as the Forbes School of Business  at Ashford University doesn't hurt these efforts, either.

I'm satisfied that the company is on the right track and will turn the situation around, possibly sooner than a pessimistic market is willing to believe. Thus, I'm going to take advantage of the 25% drop to lower my cost basis on what I believe is a winning company, and add shares as soon as Fool trading rules allow.

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Jim Mueller has no position in any stocks mentioned. The Motley Fool owns shares of Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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