Like a teacher who flunks the whole class because a few students may have cheated, Wall Street is punishing the entire profit-making education industry over allegations that will sound familiar to Washington investors.
Three and a half years ago, Manassas-based Computer Learning Centers Inc., accused of abusing federal student loan programs, abruptly filed for bankruptcy and closed, locking out thousands of students. Investors wound up with worthless stock after being assured by the company's executives and industry analysts that allegations of wrongdoing were just plain wrong.
This time investors are not waiting for the final grade on the three national chains being investigated by the Education Department and the Securities and Exchange Commission. But it is not just those three stocks being punished -- so are other education stocks, including three local companies not involved in the investigations.
Shares of Strayer Education Inc. of Arlington have fallen 28 percent from their spring peak despite the company's better-than-expected performance. Last week, Strayer reported second-quarter revenue grew by more than 25 percent to $46.8 million and net income grew by almost a third to $11.4 million. Two new campuses opened this summer, and another will open this fall.
Also taking a tumble is the stock of Laureate Education Inc., of Baltimore, which, like Strayer, caters to working adults seeking to upgrade their professional skills or obtain advanced degrees. Formerly known as Sylvan Learning Centers, Laureate spun off its kindergarten-through-12th-grade business and now operates colleges in 11 countries and two online universities.
Laureate stock is off about 19 percent this summer. "I think that we have been punished less than our peer group," said the company's investor relations director, Chris Symanoskie. Only about 5 percent of Laureate's students use the federal student loan programs under investigation, he said, while the schools under investigation depend on federal funds to pay the tuition of a majority of their students.
The education-industry sell-off also gets part of the blame for the summer's 11 percent decline in the stock of The Washington Post Co., whose publishing and broadcasting businesses are better known than its education division, Kaplan Inc. Kaplan runs educational ventures including test preparation, career training and an online law school.
Until early this year, education stocks were Wall Street favorites. Dissatisfaction with public schools and pressure to get into colleges creates a strong market for companies serving younger students. The poor job market encourages older people to enroll in career training schools and colleges such as Strayer and to take courses online from schools like Walden University, which is run by Laureate.
But only eight of the 49 education stocks in an index created by Baltimore investment banking firm Legg Mason Inc. rose during July. The industry index was off almost 7 percent for the month and all the higher education stocks were down, many to new lows. The declines continued last week. The worst losses have been inflicted on shareholders of the three chains of schools that are under investigation.
The three companies under investigation all have denied wrongdoing and said they do not expect to lose their accreditation or right to participate in government loan programs.
The stock of Corinthian Colleges Inc. of Santa Ana, Calif., (symbol: COCO) has fallen 70 percent since April as the result of a finding by the Education Department that the company violated federal student loan rules. The department has taken no action against Corinthian. Trading around $35 in April before the issue arose, Corinthian's shares plunged to $10.83 last week after the company disclosed earnings will fall short of analysts' projections.
Almost as hard hit is the stock of Career Education Corp., based in a suburb of Chicago, which has lost about 60 percent, falling from around $70 a share to $28.48 Friday.
In late June, Career Education (CECO) revealed the SEC is conducting a formal investigation of its accounting. The inquiry was launched after former employees alleged in a lawsuit that enrollment was padded.
The stock of ITT Educational Services Inc. (ESI) has fallen 46 percent to $32.21 since February, when U.S. postal inspectors raided its headquarters near Indianapolis and several ITT Technical Institute campuses. The firm said search warrants sought records about admission requirements, dropout rates, graduation rates and job-placement rates.
Those issues all affect schools' eligibility to participate in federal student loan programs, which are used by the majority of the students attending schools operated by the three companies.
They are also some of the same issues that came up in the collapse of Computer Learning Centers, which imploded after being ordered by the Education Department to repay $187 million in improperly obtained student loans.
Just as in the CLC case, allegations of irregularities are being fed by Wall Street short-sellers -- traders who try to make money by betting that stocks will go down. Short-sellers borrow shares of companies they think are in trouble, then sell the borrowed stock. If the stock declines, they can buy it back at a lower price, return the stock to the lender and pocket the difference.
Short-sellers made a bundle on CLC and some of the same players who bet against CLC have been shorting the stocks of Career Education, Corinthian and ITT Education, sources in the short-selling community report.
Another similarity is that just as analysts continued to recommend CLC stock after the company's problems surfaced, many are still giving "buy" recommendations to Career Education, Corinthian and ITT Education. Some say the problems are overblown, others say that the stocks have come down enough to make them attractive.
A more cautious approach was suggested last week in a report by the team of education industry analysts at Legg Mason, which is active in investment banking for the industry. They suggested short-term investors look at the stocks of education companies that haven't been implicated in the investigations but which have suffered "collateral damage." Laureate and Strayer were among the stocks they listed as "less risky names."
They warned investors, however, that the industry remains vulnerable to "headline risk." In a down market, with the industry out of favor, all the stocks could continue to fall, the report noted.
The weak market for education stocks may not seem an obvious influence on shares of The Washington Post Co., but at least one investor believes it has been affected. (In addition to working for The Post, I hold the stock in my retirement account.)
"I think, in a nutshell, that The Post is being tarred by the scandal in the for-profit education industry. It is to some extent guilt by association," said Stephen Leeb, a New York portfolio manager and editor of the Complete Investor newsletter. Leeb said the holdings he oversees include the stock.
Washington Post stock hit an all-time high of $983.50 a share early this year and began to fall about the same time the education stocks headed south. It is hard to tell the cause because newspaper stocks are also down this summer. Merrill Lynch analyst Lauren Rich Fine noted that every newspaper company she follows was down in July. Cable and broadcasting stocks also have been off in the past few weeks, and the company has holdings in both businesses. The Post Co. does not comment on its stock price.
Leeb's linking of the stock to the education industry underscores the growing importance of the company's Kaplan division, which operates dozens of educational businesses.
In its latest quarterly report, The Post Co. said its 16 percent increase in revenue "is due mostly to significant revenue growth in the educational division." Kaplan's revenue increased 41 percent to $276.7 million. Its operating profits jumped to $29.4 million from $3.5 million.
Kaplan has been the fastest-growing unit of The Post Co. for some time, and the recent decline in the stock suggests many investors have begun to notice that it is not just a media company anymore.