At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best...
Bang! Whiff! Two of the best known names in stockpicking marked off their paces, turned, and fought a duel yesterday over for-profit education companies such as Apollo Group (NASDAQ:APOL), ITT Educational (NYSE:ESI), Lincoln Educational Services, and DeVry (NYSE:DV).
Swiss banker Credit Suisse fired the first shot, downgrading a handful of stocks across the sector to neutral, and warning that it sees "very little room for upside" in the prices of the first three stocks named above. No sooner did Credit Suisse issued its downgrades, though, than Euro-neighbor Deutsche Bank averred that investors should be safe buying Apollo and ITT, while DeVry was labeled a "hold."
Question 1: Compare and contrast Credit Suisse...
Of course, it's not so much the companies themselves that Credit Suisse doesn't like. Rather, the banker worries that the U.S. Department of Education may soon impose a raft of new regulations on for-profit educators, hurting sales growth. Among other things, Credit Suisse fears that the DoE will:
- Make it easier for students to withdraw from school
- Require disclosure of unspecified "quality-related metrics" to potential students
- Restrict the use of "incentives" in marketing the companies' services
... with Deutsche Bank
In response to Credit Suisse's dread of the unknown, Deutsche tells us what it knows -- and likes -- about the companies. Namely, "attractive relative valuation" at Apollo Group and "industry-leading margins" at ITT. Deutsche thinks Apollo will continue to achieve high growth "longer-than-expected" and notes that ITT "has grown enrollment above the industry average since '05."
As for Deutsche's muted enthusiasm for DeVry, the analyst points out that Apollo's University of Phoenix "brand is searched in Google (NASDAQ:GOOG) 4.4x more than the next-highest for-profit university (DeVry)." Credit Suisse also sees DeVry's stock as more fully valued than some of its peers, offering less upside potential.
Scoring the graders
Education stocks were mixed on the news yesterday, with Apollo off 7%, and DeVry falling nearly 8%, but ITT up an unremarkable 1.2% -- which suggests that investors are taking Credit Suisse's worries to heart, rather than embracing Deutsche's optimism. But is that the right reaction?
In a word: Yes
According to our records on CAPS, where we've been grading each analyst's performance for more than two years -- and more than 1600 total stock recommendations -- Credit Suisse narrowly edges out its Euro-rival as the better stockpicker. Whereas Deutsche Bank gets less than half its picks right, Credit Suisse outperforms the market on nearly 52% of its recommendations. Although both banks earn the title of All-Star for being in the top 20% of investors we track, the Swiss rank about 8 percentage points higher overall.
One other thing Deutsche Bank lacks is a record on education stocks. Concomitant with the banker's "initiation of coverage" is the fact that that the analyst didn't follow this sector previously. However, Credit Suisse has covered the industry before, and it's developed quite a record here, outperforming the S&P 500 by 54 points on its previous buy recommendations of Apollo Group, by 31 points on DeVry, 36 points on Capella Education, and 22 points on its recommendation to sell Strayer (NASDAQ:STRA). About the only time Credit Suisse went wrong in this sector was when it told investors to buy ITT earlier this year (losing it 21 points).
Foolish final thought
One factoid that neither analyst mentioned but that affects the prospects of every firm in this sector: About the same time as the analysts were putting out their recommendations yesterday, The Wall Street Journal released a report on a serious threat to for-profit educator profits -- namely, a startling rise in the number of students defaulting on their student loans.
The Department of Education's estimates put the federally guaranteed student-loan default rate close to 7% now -- the highest default rate in a decade. Meanwhile, the Journal reports that private loan providers Citigroup (NYSE:C) and Sallie Mae (NYSE:SLM) are seeing their student loan write-offs skyrocket in tandem.
Considering the reasonable -- but not dirt cheap -- valuations being accorded these stocks (Apollo sells for a 15 P/E, ITT 20, and DeVry 22.5), the additional negative factor of rising default rates, and Credit Suisse's solid record in this sector, I'm inclined to side with Credit Suisse today. Maybe yesterday's sell-off will be the spark that creates a decent margin of safety justifying the risk of investing in this sector, maybe not. But until it does, my advice is to stay away.
