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Real Time Insight

Around the nation, children are settling back into another school year as the summer draws to a close post-Labor Day. Yet while many parents are likely focused in on their own children’s schools, it could be time to take a look at education from a different angle, specifically, in terms of the for-profit education sector.

This segment is often overlooked due to the high risk nature of the space, but the volatility is also capable of generating high returns in a short period of time. Furthermore the role of heavy government spending on the segment could make for stable and easy cash flows, although this could go away if the industry sees new regulations or if students shun for-profit education programs for more traditional counterparts.

In terms of investment potential, the segment currently has a very pedestrian Zacks Industry Rank, although companies are widely dispersed across the spectrum. In fact, four receive Ranks of Two or better including a number 1 Zacks Rank for Grand Canyon Education (LOPE - Snapshot Report), while seven of the 23 stocks receive Zacks Ranks of 4 or worse, including ‘Strong Sell’ Ranks going towards DeVry (DV - Analyst Report) and Strayer Education (STRA - Analyst Report).

Clearly, there is no real consensus in the sector, although it is worth pointing out that the price trend has been decidedly negative in the segment with many education stocks falling by over 30% in the summer break.

Some are worried that this could continue as we approach the fall and the election, especially because for-profit education centers have become such an easy target as of late. However, I find it hard to believe that the space will be going away anytime soon as the knowledge-based economy that we find ourselves in puts a hefty premium on skills, and these colleges may be the only way that some can eventually compete in the globalized economy.

Personally, I think the broad space is probably too risky for investment at this time, but some intriguing picks are starting to develop with companies like LOPE which has a Number 1 Rank, a P/E below 16, and a PEG below 1.0.

The broad earnings estimate revision picture is also looking favorable for LOPE, but the sector risk still seems pretty high overall. Perhaps the best way to play this volatile sector is to target top firms like LOPE and pair them with short positions in some of the many low-ranked stocks in the space. This could help to diversify away some of the industry specific risk that will likely be impacting the sector for some time to come while still allowing for profit at a potentially lower risk level.

What do you think?

Will you be taking your portfolio back to school this fall or have you graduated from the for-profit education sector?

Let us know in the comments below!

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