Please ensure Javascript is enabled for purposes of website accessibility

Was I Completely Wrong About For-Profit Education?

By Brian Stoffel – Updated Apr 7, 2017 at 8:35PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A Fool takes a second look at the industry's ability to disrupt.

I spent the better part of my first year at the Fool raging against the for-profit education community. And it was for good reason: Enrollment is dropping, they get too much money from the government, and students are defaulting on their loans at alarming rates.

But after watching a recent speech by innovation guru Clayton Christensen, I'm starting to wonder if I am reading the situation completely wrong.

The bull case
Christensen lays out three points that -- if true -- could mean big wins for for-profit schools (note: Christensen referred to "online" schools, not "for-profit" ones, in his talks).

1. Competing against non-consumption 
Christensen says that most innovation comes from companies that are able to bring products to people that otherwise would have no access to them. When that's the case, what a company is offering up is "infinitely better than nothing," so the quality itself isn't of primary concern.

For-profit education schools have brought the ability to obtain a degree to thousands of students who otherwise wouldn't have had a chance to attend college. Apollo's (Nasdaq: APOL) University of Phoenix -- the leader, by size, in the field -- has 380,800 students enrolled in its school alone!

2. Using different metrics
A typical college or university focuses on the quality of the research being conducted by faculty as a preeminent metric for value and worth that a college has. While that might seem great, it doesn't do much to ensure that students are actually being taught. Online schools worry about a different metric: the actual quality of teaching.

According to Christensen, online schools are winning that battle: "When you compare the quality of teaching in the on-line schools versus the quality ... at places like Harvard, they are so much better than us."

3. New customers will be enticed into the system
With the cost of sending a child to college sky-rocketing, more and more students may look at online schools as a viable alternative. Forced to choose between spending a lifetime paying off debt, or having to prove in the real world that they have the skills to justify their online degree, many students will begin choosing the latter.

The bear case
But just because Christensen brings up some solid points, investors shouldn't go out buying shares of every for-profit educator out there. Here are three things investors still have to worry about:

1. The actual price being paid
One of the things that makes competing against non-consumption so easy is that products are normally not that good when they start out, and they're very cheap. But with for-profit schools, they don't necessarily have to be cheap; they just need to accept students who wouldn't otherwise be accepted. The non-consumers (students) aren't held out of the market necessarily because they can't afford it, but rather because they may not qualify.

This is one reason I like Bridgepoint Education (NYSE: BPI) and American Public Education (Nasdaq: APEI) above the rest of the pack; among other things, their tuition rates are reasonable.

2. Competition from traditional schools
Just because for-profits might be the most noticeable plays for online education, that doesn't mean they're the only one. Community colleges and traditional colleges and universities are beginning to offer distance-learning programs as well. Just last month, MIT announced it would start offering free, non-degree-bearing classes on-line. 

3. Acceptance by the business community
If the professional community were willing to accept degrees from online schools as the same type of currency that a degree from a traditional school carries, it would go a long way in furthering online education. But there's really no way to tell if that will be true 10 years from now. Only time will tell if such widespread acceptance is in the offing.

Educate yourself
Last summer, I spent a lot of time going over the for-profit industry. I think players like American Education, Bridgepoint, and Education Management (Nasdaq: EDMC) are at least worth a look. Education Management seems fairly priced from where I'm sitting, though it hasn't been publicly traded long enough to get a great fix on earnings growth. There are tons to avoid, too -- none more so than industry laggard Corinthian Colleges (Nasdaq: COCO). Corinthian has changed how recruiters are compensated, and had an astonishing 38.1% of their students in default of their loans as of this summer.

If you'd rather not deal with the uncertainty that investing in for-profit schools entails, I suggest you check out our top stock for 2012. The business highlighted in our report is quickly becoming the Costco of Central and South America. Get your copy of the report today, absolutely free!

Fool contributor Brian Stoffel owns shares of Costco. He does not hold any positions -- long or short -- in any of the other companies mentioned. You can follow him on Twitter at @TMFStoffel.

The Motley Fool owns shares of Costco Wholesale, American Public Education, and Bridgepoint Education. Motley Fool newsletter services have recommended buying shares of American Public Education and Costco Wholesale, as well as creating a put write position in Bridgepoint Education. 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.