Thriving in Tough Times

Thriving in Tough Times
By Allan on November 1st, 2008



I don’t get things right as much as I’d like when it comes to the market but my Latticework Linkfest back in late February was spot on:

In times of recession, when unemployment is high, the unemployed go back to school to add marketable skills and increase future earnings power. The leading companies in for-profit education include Strayer Education (STRA), DeVry (DV), ITT Educational Services (ESI), Career Education Corporation (CECO), Capella Education (CPLA), Corinthian Colleges (COCO), and industry giant Apollo Group (APOL). Apollo operates the ubiquitous University of Phoenix campuses. This investment thesis has worked in past recessionary times, but the unique risk this time around is the possibility that the credit crisis will hamper students’ ability to repay or obtain school loans.

The for-profit education companies mentioned have for the most part been immune to the market’s recent collapse. Some have even made significant money for their investors. The risk that students and prospective students being unable to borrow tuition dollars is still very real but has yet to have a material effect. Unlike a sample basket of leading technology bellwethers like Apple (AAPL), Google (GOOG), Yahoo! (YHOO) eBay (EBAY), Microsoft (MSFT), Amazon.com (AMZN) and Oracle (ORCL) that destroyed wealth, if you invested in a basket of these education stocks, you’d have a juicy profit or at least preserved most of your wealth.



Company Ticker
Feb. 25 Closing Price
Oct. 31 Closing Price
% Gain or Loss






Apollo Group (APOL)
$62.12
$69.51
+ 11.89%

DeVry (DV)
$44.18
$56.69
+ 28.31%

ITT Educational Services (ESI)
$54.02
$87.65
+ 62.25%

Strayer Education (STRA)
$154.96
$226.27
+ 46.01%

Career Education Corp (CECO)
$15.32
$15.81
+ 3.19%

Capella Education (CPLA)
$53.85
$47.40
- 11.97%

Corinthian Colleges (COCO)
$7.84
$14.28
+ 82.14%

Education Companies Bought as a Basket
$700,000 (buying $100,000 of each as original capital)
$921,820 (value of .edu basket at Oct. 31 closing prices)
+ 31.68%






Apple (AAPL)
$119.74
$107.59
- 10.14%

Google (GOOG)
$486.44
$359.36
- 26.12%

Yahoo! (YHOO)
$28.13
$12.82
- 54.42%

eBay (EBAY)
$28.01
$15.27
- 45.48%

Microsoft (MSFT)
$27.84
$22.33
- 19.79%

Amazon (AMZN)
$73.27
$57.24
- 21.87%

Oracle (ORCL)
$18.97
$18.29
- 3.58%

Leading Tech Companies Bought as a Basket
$700,000 (buying $100,000 of each as original capital)
$518,600 (value of tech basket at Oct. 31 closing prices)
- 25.91%






Dow Jones Industrial Average
12,570
9,325.01
- 25.81%

NASDAQ Composite
2,327.48
1,720.95
- 26.05%

S&P 500
1,371.80
968.75
- 29.38%







The leading education companies collectively appreciated approximately 31% since my post published February 25 all the way to yesterday’s closing prices. If an investor had put $100,000 in each of the leading companies in that space, that basket would be worth over $921,000 today. The leading technology companies, as great as their brands and products may be, collectively lost almost 26% of market value. The index that is most apropos as a benchmark in this comparison, in my opinion, would have to be the NASDAQ Composite, which lost 26% of its value as well. An investor putting initial capital of $700,000 in either the NASDAQ Composite or the technology basket would have only $518,000 of value remaining. That’s a whopping difference of approximately $403,000 between the education portfolio vs. the technology portfolio or the NASDAQ index.

Have I been able to profit off this insight? Unfortunately no. I went into cash on June 25th for the majority of my portfolios and my private investment partnerships. In a summer of uncertainty and volatility, I thought it would be a prudent measure to preserve wealth - which has turned out to be a service for my investors and myself (unless of course inflation is higher than what the government is officially reporting). The real estate asset bubble appeared to have made other things expensive as home equity propped up prices in the stock market and other financial markets.

What’s next? Given the stellar performance of for-profit schools, I would take some profits off the table. As much as I admire Warren Buffett, I don’t have the capacity for pain to buy and hold like the old master of value investing. On a macro level, the risks to the education sector in particular and the market in general are still profound. The next shoe to drop will be fund redemptions or withdrawals from mutual funds and hedge funds, which I alluded to in Long Term Capital Mismanagement. If this occurs in a heavy way, the overall market will lose some more value and push us deeper into this bear market. The other shoe that could drop would be a failure of the consumer credit market. Credit card companies will reduce credit lines as consumers fail to meet monthly credit card payments. Consumers no longer have rising home equity to feed their spending habits. Rising unemployment also increases the likelihood of household bankruptcies.

What can we learn from this downturn?

From an investing point of view, there are always countercyclical investments available. Higher in the value chain of countercyclicals are the for-profit education companies. They are far more attractive than the conventional defensive stocks such as food manufacturers like Kraft Foods (KFT).

From a business point of view, I can only speak from the technology startup standpoint as that is where I spend much of my time. It is nice to see that people will be going back to school to learn new skills and improve their future earnings. But as much as I believe that talent can come from anywhere, as a startup entrepreneur I can seldom take the risk of hiring people out of these for-profit vocational schools. I’d rather hire someone without a degree but was passionate enough to teach himself how to write code. Or I’m looking for the genius from Stanford or MIT who dreams in code.



We all know that the rigor of most of these vocational schools like Strayer and University of Phoenix just isn’t up to par with our top national universities or even regional ones like University of Utah, Brigham Young University, University of Colorado, University of Arizona, or University of Nevada Las Vegas. Vocational institutions’ lack of selectivity (anyone can sign up for school with Strayer while prestigious institutions like UC Berkeley reject an overwhelming majority of applicants) and their lack of rigor means a bunch of job candidates with bad habits. Of course there are rare outliers and standouts, but does a startup have the time to evaluate and separate the few good from the mostly mediocre?

A startup’s early days are its most productive and critical. Founding teams employ magic to make something out of nothing. Startups cannot afford to take risks on what most likely will be mediocre talent. Let the large soulless organizations like Ingenix (UNH), Convergys (CVG), and IT departments across the Fortune 500 suck up all the graduates from vocational schools like Strayer, Capella, and DeVry. While the for-profit education companies can make for great investments, their graduates would usually make poor investments.


http://allantyoung.com/2008/11/01/thriving-in-tough-times/