Act in haste; repent in leisure.
Click that link, and you'll see what happened when certain investors overreacted to Thursday's news that for-profit, pre-K-to-12 educator Educate (NASDAQ:EEEE) had missed analyst estimates. You can also see what subsequently happened when other investors decided the news wasn't so bad after all. Those who sold took as much as a 7% haircut on their Educate shares to get out at the bottom. Those who held, or bought, saw their shares rebound part of the way on Thursday and then continue to rise on Friday, and again on Monday.
Now that the bleeding is done and the healing has begun, let's do a quick postmortem to figure out what so frightened Thursday's fraidy-cats and what enticed the brave souls, who reaped the gains, to stick around for their reward.
Early Thursday morning, Educate reported earnings of $0.08 per share in profits (53% less than in last year's Q1) on $92.9 million in revenues (up 13% year over year). At first glance -- which is all that a trader gets when frantically tapping "buy" and "sell" buttons in the opening minutes of trading -- that looks pretty bad. Comparing apples to apples, Educate earned just half of what analysts had predicted. Calculated in the currency of "adjusted profits," Educate said it earned $0.05 per share.
So what was it that less reactionary investors saw, five minutes after the market opened, that the trade-on-the-headline crowd missed? Here are a few facts:
- Q2 profits are expected to "significantly" exceed Q1 profits.
- Operating profits, generally, are expected to shift toward the second half, meaning that Educate still expects those profits to come in -- just a bit later.
- Educate expects full-year revenues to beat fiscal 2005 numbers by 20% to 25% and for profits to be up about 15%.
And then there's the factor that we've all been reading in the papers and seeing on the evening news practically every night for the past month: Colleges are tougher than ever to get into. Students are panicked. They're taking test-prep courses from Princeton Review (NASDAQ:REVU), Washington Post's (NYSE:WPO) Kaplan, and Reed Elsevier's (NYSE:ENL) Harcourt. They're hiring "college application consultants." And, yes, they're enrolling in supplemental education services such as Educate offers -- all to help give them an edge over their peers.
While this trend's been developing for years, there's no end in sight, and it may have years more to run. Sell Educate now, near the trend's beginning? Go ahead. But be ready to repent in leisure.
Fool contributor Rich Smith does not own shares of any company named above.
