For-profit education companies finally seem to be winning their fight against the Obama-era regulations that pushed two behemoths, Corinthian Colleges and ITT Tech, into bankruptcy, while the others saw their stock prices and enrollment plunging.
The Department of Education under Education Secretary Betsy DeVos has delayed implementation of gainful employment rules, withdrawn key federal student loan servicing reforms, and signaled a less arduous regulatory environment for the industry. DeVos defends her decisions to relax a number of Obama policies in an effort to keep for-profit schools as an option for non-traditional students. However, many industry pandits claim that it will trap students with false promises, burdens them with debt and finally leave them without any skills required to secure decent jobs.
Investors are also taking notice of the positive changes in the industry and for-profit school stocks are witnessing a strong lift under Trump's presidency and DeVos’ control. The Zacks School Industry rallied 48.1% year to date, outperforming the S&P 500’s gain of 11.1%. The industry has every reason to celebrate as it appears to have received everything it had lobbied for.
Trace Urdan, a research analyst at Credit Suisse, said, "Trump helps make these companies more investable because there is less concern that the government is trying to drive them out of business."
Moreover, the administration has quietly silenced a federal task force intended to address the abuses at for-profit colleges and share information across investigative agencies such as the Federal Trade Commission, the Consumer Financial Protection Bureau, the Securities and Exchange Commission and state attorneys general.
Apart from the much-needed regulatory support, industry giants are finding innovative ways to compete in the increasingly competitive education landscape and deliver returns to shareholders. In order to boost growth, school companies have resorted to aggressive cost-cutting measures through significant layoffs and campus closings.
For-profit education companies are investing in digital capabilities and stepping up social media efforts to increase their brand value as well as boost enrolment growth. The for-profits are also forging corporate and community college partnerships to educate their workforce. Additionally, companies are improving their technology and infrastructure, increasing investments to improve the academic quality and retain students, buying complementary businesses, and regularly introducing new programs and specializations to boost student outcomes.
School stocks are set to gain the most from this optimism. The Zacks School Industry is expected to witness a solid 91.2% growth in revenues this year, higher than the broader market’s expected growth rate of 4.7%.
The positive momentum is evident from the robust Zacks Industry Rank of the industry, occupying top 39% out of 256 industries.
4 Stocks to Bet On
With the help of the Zacks Stock Screener, we have handpicked four stocks in the Zacks School Industry based on a good Zacks Rank and other relevant metrics that are reaping the benefits of the current positive scenario and have the potential to further grow.
Grand Canyon Education, Inc. (LOPE - Free Report) is a provider of online postsecondary education services. Shares of Grand Canyon returned more than 100% in the last one year, outperforming the Zacks School industry. It also has a Momentum Score of B.
Grand Canyon has a solid three-five year EPS growth rate of 13% and boasts a solid ROE of 21.8% (higher than industry’s 6.3%). This earnings momentum is likely to continue in the near term, as reflected by the company’s projected EPS growth of 20.4% for the current year (higher than the industry average of 11.1%). Revenues are also expected to grow 10.5% this year.
In the last 60 days, the Zacks Consensus Estimate for the company increased 4.6% for 2017 and 3% for 2018. The positive earnings estimate revisions indicate analysts’ confidence and substantiate the Zacks Rank #2 (Buy) for the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bright Horizons Family Solutions Inc. (BFAM - Free Report) is engaged in providing employer-sponsored child care, early education and work/life solutions.
Shares of Bright Horizons returned almost 15% year to date, outperforming the Zacks Consumer Discretionary sector’s growth of 10.6%. The stock also holds a Zacks Rank #2 and boasts a solid Growth Score of B.
In the last 60 days, the Zacks Consensus Estimate for the company increased 1.1% for 2017 and 2% for 2018. For 2017, the company’s EPS is likely to grow 22.3% (higher than the industry) and 13.3% for 2018. Its three-five year EPS growth rate is pegged at an impressive 20%. The stock has a solid ROE of 19.2%, a lot higher than the industry average.
K12 Inc. (LRN - Free Report) , a technology-based education company, has gained more than 36% in the last 12 months. The stock flaunts a Zacks Rank #2 and a VGM Score of A.
This top-ranked stock has seen its earnings estimates grow 6.4% for the current year. The stock has a Growth Score of A and Value Score of A. K12 has surpassed estimates by an average of nearly 26.55% in the trailing four quarters.
Global performance improvement solutions provider GP Strategies Corporation (GPX - Free Report) has a three-five year EPS growth of 15%. In the last 60 days, its earnings estimates have moved up 0.8% for 2017.
The company has expected earnings growth of 5.8% on revenues of 5.5% for the current year. GP Strategies has outpaced/met the Zacks Consensus Estimate consistently in each of the trailing four quarters, the average beat being 6.02%.
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