How investors can earn by helping others learn

For-profit education companies present stock opportunities. But some question whether they truly benefit society.

posted May 20, 2008 at NaN:NaN p.m. EST

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"Doing good is a nice aphorism, but the fact of the matter is they're looking for profits," Mr. Levin says. "They say, 'We're doing good because we're taking disadvantaged kids.' Well, you're not doing good if the students are incapable of benefiting from good instruction because they lack the skills."

Ethical or not, stocks of certain higher education firms have done remarkably well at times. Shares in Apollo Group, parent company of the University of Phoenix, are now trading about 4,700 percent higher than at the company's 1995 initial public offering. DeVry's stock in mid-May was up 70 percent from a year earlier.

In both cases, however, this month's prices reflect a drop from previous highs. Apollo shares, for instance, lost almost half their value in this year's first quarter. But big gains have been nonetheless within reach for long-term investors.

Apollo may be profitable, but it's no ethical role model, Levin says. The company has settled multiple lawsuits, including one for collecting excessive student loan payments and another involving back pay for employees. But some socially responsible investors aren't convinced they should stay away from Apollo or anyone else in this industry.

Ariel Investments, a Chicago-based socially responsible mutual fund, regards for-profit higher education as an industry where its managers have culled expertise for some 15 years. Currently its funds have no exposure to the sector because this year's credit crisis has made it vulnerable to further price drops, according to Bob Goldsborough, Ariel's vice president of research. But in terms of Ariel's social screening, no public company in the higher education business is off limits for consideration in the future.

DeVry and Career Education (CECO), for instance, "really fill a void in the market where people in certain segments of society wouldn't have access to education otherwise," Mr. Goldsborough says.

Other investors steer clear of certain for-profit education niches for moral reasons. Some clients of Walden Asset Management, a Boston-based private money-management firm with a socially responsible focus, decline to invest in operators of private K-12 schools because they fear such companies could adversely affect public schools. Nevertheless, Walden invests about 5 percent of assets in its small-cap portfolios in other types of education-related stocks, such as textbook publishers and educators of working adults, according to Kenneth Scott, director of small-cap investing.

For investors squeamish about losing money in education stocks, another option is municipal bonds. Education ranks as among the most common areas to receive funding through municipal bonds. In the fourth quarter of 2007, for instance, states issued more than $23 billion worth of debt to support such ventures as new public-school construction and physical-plant development at public universities.

"The only way large, complex institutions can manage their capital plan is to use debt," says Matthew Hamill, senior vice president of the National Association of College and University Business Officers, a professional association in Washington. "So there are ample opportunities for investors, [and these bonds] are an awfully safe form of investing capital."

For investors with $50,000 or more to deploy, the realm of possibilities grows wider. The Calvert Foundation, a nonprofit community financier in Bethesda, Md., can sometimes link investors to educational projects such as First Book, a nonprofit promoter of child literacy in low-income communities. Investors must commit funds to a Calvert Foundation note for at least one year and select a rate of return, which can range from 0 to 3 percent.

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