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For-profit education stocks took a beating on the most recent round of earnings. Industry bell weather Apollo Group (NASDAQ:APOL) dropped as much as 19 percent in a single day when it slashed revenue estimates and announced it would close several locations, and related stocks fell in sympathy.
The industry has been subject to the ups and downs of the current election cycle as analysts and investors debate the pros and cons of an Obama or Romney administration on the sector.
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A huge part of revenue for most higher education comes from federally insured student loans. The 90/10 rule requires for-profit colleges to get no more than 90 percent of their revenues from Title IV federal student aid. A subject of debate is the fact that military education benefits are not covered under the federal portion of the formula for the 90/10 rule. The nature of this arrangement has led to aggressive recruitment of veterans and service members by for-profit colleges who want that revenue.
In July, a Senate committee published a report that criticized the industry, saying that taxpayer money is being wasted on students who attend many for-profit institutes that end up teaching them nothing and costing thousands of dollars.
In April, Obama probably upset some for-profit institutions by signing an executive order that required them to increase transparency and end “abusive marketing practices” such as creating websites that resemble official government pages. Bridgepoint Education (NYSE:BPI) in particular is being investigated by the Department of Justice for its recruitment practices, which allegedly linked compensation to the number of students brought in. Other schools brought into question include DeVry (NYSE:DV) and Corinthian Colleges (NASDAQ:COCO).
The industry gained even more attention in the current election cycle because of the “gainful employment” rule adopted by the Education Department. The rule is designed to reveal organizations that burden students with debt while insufficiently training them for jobs.
Donations to political campaigns from the for-profit education industry have been increasing steadily every election cycle since 1990. In 2012, total contributions came in at $3.4 million, with a surprising 70 percent going to Republican candidates.
The average split for donations since 1990 is 50-50, and Democrats received the majority of donations from the for-profit education industry in the last two election cycles. In the 2008 cycle, when Obama was running for his first term in office, Democrats received 65 percent of $1.5 million in contributions.
Given the how each candidate views for-profit education, this split is less surprising. Obama has set himself up as an enemy of the industry, while Romney looks like he would champion privatized education if he were elected.
That being said, publicly-traded, for-profit education companies work on a sort of backwards logic where they have split obligations to shareholders and students. The conflict of interest seems pretty obvious.
On election day, for-profit education stocks are coasting higher. Apollo Group is up over 5.5 percent in afternoon trading. Corinthian Colleges is up over six percent and ITT Educational Services (NYSE:ESI) is up over 7.5 percent.
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