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When the economy falters and Americans lose their jobs, they don't sit on their hands.
They go back to school.
And that's why for-profit education companies can do well during economic slowdowns. These companies provide master's degrees as well as training in everything from nursing to the nuances of shielded metal arc welding.
Their enrollments can grow as the economy weakens, and their stock prices should follow. Consider:
- During recessions and for the first year after, enrollment growth at schools that specialize in teaching practical skills in programs lasting less than two years -- such as Corinthian Colleges (COCO, news, msgs) -- has jumped 12 percentage points, on average, over the past four decades.
- During the 2001-02 recession, enrollment growth in four-year programs offered by for-profit companies nearly doubled. Earlier numbers are less striking; enrollment held steady or fell slightly during recessions between 1970 and 2000. But workers in today's knowledge-based economy face more international competition than during 1970-2000, which could compel more people to go back to school.
- Enrollment growth in full two-year programs has dipped slightly during recessions, on average. But only slightly.
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These numbers come from BMO Capital Markets analyst Jeffrey Silber, who made the only attempt I could find to quantify recessions' effect on education stocks. He makes a good case that enrollment rises as the economy slows. That's especially true, he says, "as one moves downscale from doctoral to nondegree programs."
Helpful trends
Besides an economic slowdown, for-profit education companies such as Strayer Education (STRA, news, msgs), Apollo Group (APOL, news, msgs), Career Education (CECO, news, msgs), DeVry (DV, news, msgs) and Corinthian have several trends going for them, say analysts and mutual fund pros who hold these stocks.A summary:
- More and more people are in dead-end jobs that don't pay enough to support a comfortable, middle-class lifestyle. "Education is a great 10-year trend," says Amy Sunderland, an analyst at the Wasatch Small Cap Growth Fund (WAAEX), which holds shares of Strayer. "As we continue to move from manufacturing to service-sector jobs, the earnings premium for having a bachelor's and a master's degree increases."
- From 2005 to 2016, the number of people ages 18 to 24 will increase 15%. Still shaping their careers, these "echo boomers" will be looking for additional training. The flexible schedules of for-profit schools' courses are often easier to fit around jobs.
- Nearly 40% of people who seek education after high school are 24 or older. This number will increase by about 20% over the next eight years. That age group is more likely to turn to courses offered by for-profit education companies than to traditional universities and colleges, says Apollo Group President Brian Mueller.
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What stocks to buy nowMSN Money's Jim Jubak suggests you delay purchasing stocks that rely on an economic rebound. Instead, he says, look for stocks that can survive shaky times -- and keep an eye on how the market reacts to earnings reports.
Mueller, by the way, doesn't believe rising unemployment helps his company much. Most of his students have jobs. He said in a recent conference call that Apollo draws from the "underemployed," or people in "very low-level jobs that don't show a whole lot of prospects."
But I'd call this a distinction without a difference. After all, the ranks of the underemployed increase during recessions.
A student-loan crunch?
So if things are so great, why are these stocks down as much as 50% in the past few weeks? Mostly because of a fear of a student-loan shortage sparked by:- A credit crunch hitting all lenders because of questionable debt instruments and subprime home loans.
- Recent cuts by the federal government in the interest rates and fees private loan companies can charge for student loans.
The worry is that lenders such as SLM Corp. (SLM, news, msgs) (better known as Sallie Mae), Citigroup (C, news, msgs) and JPMorgan Chase (JPM, news, msgs) will pull back on student loans. About 30% to 35% of students at for-profit schools rely on the private lending market rather than federally guaranteed loans.
"There is the fear that that the lenders will be a lot stricter on who they give loans to and that they will ask the schools to share some of the risk," analyst Silber says. "So the stocks are just getting killed."
Continued: What's the expert outlook?
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