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The Best Education Investment Is Yourself
Posted: Jul 30, 2009 11:01 AM by Sham Gad
Reading my local paper this morning, an article reported that our local technical college is experiencing record enrollment figures. It seems that many other technical and specialty degree schools all over the country are experiencing similar growth rates.
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It's Not Rocket Science
It's easy to understand why demand for education increases when the economy is suffering. People without jobs want to make themselves more marketable for other types of employment. And folks that are employed want to make themselves more valuable at their existing job. This education phenomenon occurred once the economy busted after the internet boom and it's happening now.
For what it's worth, I have always felt that the greatest investment anyone can make is to invest in themselves. An average citizen probably has about 40 to 45 years of true earning power. Any effort put forth to maximize one's education and skills increase that power exponentially. (For more, see Paying For College In An Economic Downturn.)
What about Education Stocks?
Many investors are looking at education stocks as possible recession plays. One of the most widely known education players, the Apollo Group (Nasdaq:APOL) owns the University of Phoenix, a university well known for its wide range of online degrees.
Last year, UOP enrollment leapt 21.8% and as a result, Apollo increased it sales by 26% to $1.05 billion. Sales growth can be found at other for-profit education providers DeVry (NYSE:DV), ITT Educational (NYSE:ESI), Corinthian Colleges (Nasdaq:COCO) and Career Education (Nasdaq:CECO).
Unfortunately, my high regard for education doesn't spill over to the education sector, at least not now. First, many of these companies are priced for perfection. Both Career Education and Corinthian trade at P/E multiples of over 30 times earnings, respectively. Apollo is arguably the strongest in group. Not only does it trade for a palatable 15 times earnings but the balance sheet is solid with no debt and $800 million in cash.
My second issue with the education providers is that their business model is very profitable during boom times but an absolute disaster when demand slackens. And there is not much they can do until the next cycle comes. This is because each additional student adds very little to the company's cost. A university will have the same fixed costs whether there are 500 students or 50,000 students.
Finally, the biggest surge in new enrollment began a year ago, when the economy's problems were really getting serious. Because markets anticipate, the best gains may have come and gone for education providers.
The Bottom Line
Given its dominant franchise and pristine balance sheet, Apollo would be the only one in the group that I would consider owning. The stock price sits near $70 down from its highs of $90 set back in February of 2009. In other words, as the market has surged on hopes of an improved economy, shares in Apollo have sunk over 30%.
At this juncture, it appears that the best way to profit from the education boom is by educating yourself and avoiding the education stocks. (For further reading, see Invest In Yourself With A College Education.)
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By Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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