School is in session, boys and girls, and it's big business. In the past 18 months, the education and training services industry has performed exceptionally well, delivering 150% aggregate returns to the lucky shareholders of its various publicly traded companies. Naturally, the contrarian in me looks at such success with a skeptical eye and wonders if things haven't gotten a little out of hand.

The education and training services industry consists of companies like Apollo Group (NASDAQ:APOL), Career Education Corp. (NASDAQ:CECO), Corinthian College (NASDAQ:COCO), Strayer Education (NASDAQ:STRA), and Sylvan Learning (NASDAQ:SLVN). All of these companies provide some form of post-secondary education targeted at the adult working student over the age of 24. In addition to physical campuses, each of these companies also has an online presence, which allows students to earn degrees without the expense of relocating to a physical campus.

Diplomas and dollars
The 12 companies I looked at in this group are valued at more than $40 billion. A full $20 billion of that market capitalization is tied up in one company, Apollo Group, which owns an 85% interest in the University of Phoenix Online (NASDAQ:UOPX). In looking at the valuations of this group, I dusted off an ancient and somewhat blunt tool that old-school Fools remember from TheMotley Fool Investment Guide as the YPEG. For those of you unfamiliar with the YPEG, check out this article.

To arrive at a YPEG-style valuation for a company, you simply multiply the analysts' estimated growth rate over the next five years by the projected earnings per share (EPS) a full year out. carries next year's EPS estimates on our quote pages, and Yahoo! (NASDAQ:YHOO) Finance shows analysts' five-year percentage growth expectations.

While it's inaccurate to say that the YPEG is a great valuation tool, it is accurate to say that the YPEG valuation represents the most optimistic expectations of analysts that follow the company. Given how excitable and conflicted these folks are, I use the YPEG valuation as the outer limits of rationality, heading dangerously into the land of make-believe.

The steep price of education
So how do our friends in the education and training services industry hold up to the YPEG? Not well. As a group, these companies are 23% overvalued by YPEG standards. The slightly more disturbing wrinkle on this little exercise is that not only do analysts estimate five-year growth percentages for these companies, they also estimate five-year growth rates for the industry as a whole. The consensus growth projection for this industry over the next five years is 13.69% annually.

Oddly, not a single company of the 12 I looked at is individually estimated to grow any less than 20%. This begs the question: If none of the companies individually are expected to grow less than 20%, where is the 13.69% growth rate coming from?

It might be that the 13.69% growth rate over the next five years is more accurate than the individual estimates for each company, largely because analysts tend to inflate their expectations when it comes to companies they follow, but they are more discerning (and accurate) when looking at an entire industry. If you believe 13.69% is closer to the truth, then these companies may be as much as 80% overvalued.

Matriculation down to a trickle
Not wanting to simply rely on a somewhat antiquated valuation tool like the YPEG, I looked into the financial statements of various companies, hoping that somewhere I'd find growth projections that justified these rich valuations. I started with the 10-K for Apollo Group, the largest company in the bunch, and found the following: "According to the U.S. Department of Education, over 5.9 million, or 39%, of all students enrolled in higher education programs are over the age of 24. This number is projected to reach 6.6 million in 2007 and 6.9 million in 2012."

Call me crazy, but that's less than 2% annualized growth in the student population being targeted by these companies over the next eight years. I'm not excited about that, and it certainly isn't a convincing argument to pump up the valuations of these businesses. Further, the University of Phoenix reports having 200,000 students enrolled in degree programs out of the 5.9 million students over the age of 24.

Now, you might look at this and say that University of Phoenix has incredible room to grow. I look at it exactly the other way and say that the University of Phoenix has been the most insanely aggressive marketer of them all, and they've captured 3.3% of the market. I don't have a lot of faith that they can expand their market share considerably, nor am I impressed with the demographics over the next five to 10 years.

What does all of this mean? Are these companies bad companies? With the possible exception of ITT Educational Services (NYSE:ESI), which is under investigation by the SEC and Department of Justice, these companies are solid businesses delivering real value to their shareholders and their students. As a whole, these institutions should be proud that they've carved such a great niche and helped many people get an education they might not otherwise have received.

That said, these companies aren't cheap, and I don't believe that they'll deliver market-beating returns in the future. If you own any of the companies in this industry, you at least owe it to yourself to run your numbers again and cast a skeptical eye at valuations. Forewarned is forearmed, so don't say I didn't warn you.

Now what?
While I firmly believe that the education and training stocks are overvalued, I'm equally convinced that Tom Gardner is uncovering some of the most undervalued small-cap companies around. You really should take a free trial to the Hidden Gems newsletter and get Tom's latest stock selections at no risk.

David Forrest doesn't own any of the stocks mentioned here, but he does have a friend who got her doctorate from the University of Phoenix and was very happy with her experience. The Motley Fool is investors writing for investors.