For the past three days, I've been going through the for-profit education sector. Having been a vocal critic of the industry in the past, I realized the need to look for quality in the industry. We have examined the major risk factors facing for-profits, which include:

  1. New student enrollment numbers.
  2. Adherence to federal funding guidelines.
  3. Student-loan default rates.

After sifting through the information, I've put together this nifty chart to help us synthesize all of the information. After going through what it means, I'll reveal my diamond in the rough.

Editorial

For more information on how I arrived at these numbers, see the links to the previous articles in this series.

Don't waste your time
Apollo, ITT Tech, and Strayer may emerge as solid investments, but the risks involved are too high for my hard-earned money. Taking it a step further, I have serious doubts as to whether Corinthian Colleges will even be around five years from now, given its heavy reliance on federal funding and sky-high student-loan default rates.

Investment candidates
This leaves us with three candidates for our investment dollars. Though the fundamentals look solid for Education Management, Bridgepoint, and American Public, we wouldn't be very Foolish if we didn't look at the valuation for these three companies.

School

3-Year Earnings Growth Rate

P/E (TTM)

P/E (forward)

Short % of Float

Education Management 61% 12.4 14.0 12.5%
Bridgepoint 239% 7.8 7.7 81.4%
American Public 42% 27.5 19.4 8.4%

Three-year EPS growth from Capital IQ, all other information from Yahoo! Finance.

Second runner-up
It seems like Education Management just doesn't have the numbers to justify my investment dollars. It hasn't been publicly traded long enough to get a fix on how it can grow earnings, and the stock seems to be priced fairly given the company's prospects.

First runner-up
A quick look at Bridgepoint shows a company that is deeply misunderstood by Wall Street. An amazing 81% of shares available for trading, or the public float, are sold short. Part of that is because Warburg Pincus' private equity firm controls nearly two-thirds of the company. And Wall Street doesn't see much growth on the horizon, giving the stock a forward P/E of 7.7.

However, the runway for Bridgepoint's growth is enormous. Given the school's size and plans for expansion, I think Bridgepoint represents a great candidate for the short-to-mid-term investor. Clearly, some professional Fools agree, too, as it is an active recommendation by our Million Dollar Portfolio, Special Ops, and Hidden Gems newsletters.

My diamond in the rough
That being said, I'd rather take a decades-long view of the industry when making investment decisions. Surely, Bridgepoint will grow, but I'm not 100% clear how it'll sustain growth and avoid the problems that have fallen on the shoulders of all the other, more developed industry players.

When I look at American Public, I see a company that should still be prospering 20 years from now. First of all, its laser focus on the military community provides a key differentiator. As this military market share continues to expand, the company will benefit from having a group of focused students who get their money from outside Title IV funds. Defaults should continue to remain low as well, as its tuition costs are relatively cheap.  The icing on the cake is the fact that the company is expanding to civilian populations as well.

Interested in keeping up on the latest happenings in the for-profit education industry? Add these two companies to your watchlist and you'll always be in the know.