October 17, 2021

A call with an industry short fund

 

Last week we spent some time on the phone with a well-known industry short fund.  We discussed the industry as a whole, as well as specific issues facing the industry which were behind their premise that shorting the industry was a good play for the next few years. Topics such as gainful employment, new compensation rules, default rates and the power of non-profit brands extending into the online education were the main points.  Gainful employment in conjunction with 90/10 is in our opinion a biased illogical political move to hinder the growth of one industry segment for profit schools to the benefit of another nonprofit schools.  If the rule is sound & logical, why wouldn’t it

be industry wide, the answer is clear, it’s not a well thought out rule.  If the traditional colleges had to live within gainful employment you would see far fewer lawyers, doctors, economists, political scientists (maybe that’s a good thing) philosophers, literary scholars, teachers, artists, theorists etc.  Who’s going to fill the entry level positions?  Aren’t they stepping stones?  We guess they will be filled by graduates of traditional colleges with English, Liberal Arts & Art history degrees whose $200,000+ education clearly provided them with such a solid and relevant foundation.  Default rates, well they need to be managed, schools need to ensure that the engagement & value their student receive from the education provided them is compelling.  We need to utilize assessment to make sure students enter program they have real interest and a likelihood of success in.  And we need to screen for and provide the remedial assistance necessary for students to be able to be successful in their education.  Will the industry be able to manage them successfully, YES.  As for the value of brands, this is a topic which has been discussed for many years.

 

 

We all know a brand is valuable.  We all know having a brand is a huge advantage and can significantly reduce the marketing costs of student recruitment.  But the big caveat is “can”.  Most traditional colleges significantly lack the admissions infrastructure and wiliness to adapt as necessary to be competitive to succeed in the fast paced world of online  education.  The partnerships between traditional colleges and for profit enterprises have proven that they can work and achieve fast growth, but those are still few in number.  The real questions is when will we see an influx of these partnerships, and how much of an effect will they have on the for-profit EDU industry>

 

Comments

  1. These shorts have done very well for themselves. There is a lot to be said for uncertainty. I look forward to the day the shorts loose their shirts

  2. Rob MacArthur says

    No such luck in 2011. Many hedge funds shorted Apollo up around 80 or 90 in 2009, ITT over 100, Strayer at 250 etc. It was almost a no-brainer when Bob Shireman was brought on board at DOE. Thankfully, revoking the protections from the Safe Harbors was the first order of business–bye-bye incentive comp. However, when Apollo hit 35 ish at the end of 2010, most short sellers covered (bought back) their borrowed shares booking profits. There were several opportunities in between to cover and re-short, in that 2 year period. With the stocks down so much even with new enrollments down 45% for Apollo the bottom feeders were willing to buy in 2011, at great risk. Add some aggressive share repurchases and a little window-dressing at the end of the year and Apollo had a 50% return in 2011. So where are the shorts going in 2011? Higher Learning Commission will be doing its re-accreditation of UOP this year. Syvlia Manning in principle seems tougher than Steve Crowe; however, the systemic corruption is so high, I am not advising clients to short on the possibility that UOP goes through something similar to Career Education in 2004 when SACS suspended their accreditation. The 2 OIG reports to HLC were shots across the bow, but I doubt DOE will have much influence on HLC. Cynicism is a prerequisite of the short side of the market. UOP has really shot themselves in the foot. They blame the bad press for their down total enrollments. From what I hear the students themselves are so negative that they are talking to other students out of staying enrolled. They have a terrible PR problem no matter how many hundreds of millions they spend on advertising to counter it. UOP is dying on the vine from within. Morale at the level of the enrollment counselors, financial aid counselors, and academic advisors is low. There are few barriers to entry for the industry in general and UOP will need to make significant investments in quality of education in the area of teacher pay, qualified teachers, etc. I suspect there will be more pressure on the industry from Congress, but that’s not a good enough reason to be short either. None of this is good for earnings. UOP’s excuse that total enrollments will be down for several quarters because of higher graduation rates is not credible. Their graduation rates are too low to begin with to have any impact.

    So what’s left? I question the integrity of the balance sheet. I don’t believe the balance sheet. What % of enrollments are receiving Pell? What is the drop-out rate for Pell Recipients and are Pell funds being disubursed on a timely basis? The industry incorrectly assumes that compliance with Title IV regulation makes them compliant with SEC regulations regarding revenue recognition and proper disclosures. Its right in the 2009 program review–UOP has been a repeat offender. It is in the 2003 program review, the Dec 05 and Jan 06 OIG audits through the 2009 program reivew. What if the behaviors of making late and incorrect refund calculations, inccorect last dates of attendance etc have never changed. DOE only took a sample. I am betting that it’s systemwide and intentional to skim funds. The fines were nominal the revenue recognition was not. Eventually Uncle Sam is going to come looking for that money, the Hansen memo will be revoked and the industry will be forced to return money to the feds. The whole industry could go zero following Computer Learning Centers model. That’s just a theory of course, but one that people that have been around awhile seem to understand. John and Peter better hurry up and sell their stock, with 14 million shares, it is going to hurt when the stock gets killed-again. God forbid the SEC investigation goes against them. I recommended clients sell short Apollo up around $54, but I have no specific reason or event to justify it other than the stock has rallied back from $35 in 2011.

    From the Department of Education OIG audit (public document): “UOP systemically monitored students’ status and progress, readjusting the beginning and ending dates of payment periods to accommodate leaves of absence, ‘no shows’, failed courses or repeated courses. Referring to this process as ‘remapping’, UOP readjusted payment period end dates and re-scheduled second disbursements to assure that students actually completed their first payment periods and were eligible for a second disbursement.” What if that behavior never changed? The company may claim that this is not being done anymore. It is within in the rights of any free thinking institutional investor to not believe managment of any public company and to invest accordingly And if they turn out to be wrong they lose a lot of money. That’s how the stock market works. It is your brain against my brain. That’s what the short side is about–not believing management when they lie or when they are in a state of denial about an issue.

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