For-profit education stocks had a miserable 2010, with the five largest stocks in the sector dropping an average of 26% in a year the market rose nearly 13%. Increased government scrutiny of graduation rates, loan repayment rates, and the marketing tactics used to boost student enrollment kept the companies in the headlines and drove the stocks down.

Today, many stocks in the sector look cheap, very cheap, and have fallen dramatically from their highs. However, the stocks may not be as cheap as they look, as the real bad news for the companies is just starting to roll in.

Company

Market Cap

P/E (TTM)

Forward P/E

% Decrease From 52-Week High

Apollo Group (Nasdaq: APOL)

$6.02 billion

3.6

9.2

38.9%

DeVry

(NYSE: DV)

$3.14 billion

10.8

9.2

39.8%

ITT Educational Services

(NYSE: ESI)

$1.94 billion

5.7

5.5

50.3%

Career Education (Nasdaq: CECO)

$1.63 billion

9.3

7.3

44.2%

Strayer Education (Nasdaq: STRA)

$1.60 billion

12.7

11.1

54.9%

Corinthian Colleges (Nasdaq: COCO)

$392 million

2.8

10.3

75.9%

Source: Yahoo! Finance. TTM = Trailing 12 months.

On Friday, Strayer Education announced that its new student enrollments had dropped 20% for the winter school term, and when University of Phoenix parent Apollo reported earnings Monday, the company reported that its new student enrollments were down by 42%.

So why are new student enrollments such a big deal? New student enrollment is a leading indicator of revenue.  The chart below shows Apollo's year over year growth in new student enrollment, total enrollment, and degree program revenues. Assuming total enrollment and degree revenues track new enrollments as closely as they have in the past, it's hard to see how Apollo's revenue won't decline. While the data shown in the chart are specific to Apollo, the experience of an industry leader is likely a telling indicator of what's on the horizon for other companies in the sector as well.

April


Source: Company reports.

Stocks like Apollo may be well-priced for low or no growth in revenue and earnings, but I'm skeptical that they are priced for declines, possibly significant ones. Sure, costs may be cut aggressively, but it's difficult to cut costs quickly or deeply enough to maintain earnings when revenue declines rapidly.

As other companies in the for-profit college industry report earnings in the coming weeks, watch closely for any information on new student enrollment trends. To keep track of Apollo, Strayer, and other for-profit education stocks mentioned, add them to your watchlist.     

Fool contributor April Taylor does not own shares of the companies mentioned. 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.