How investors can earn by helping others learn
For-profit education companies present stock opportunities. But some question whether they truly benefit society.
Whenever financial planner Stuart Speer catches a whiff of fresh federal funds flowing into a particular sector, he smells opportunity to make money for his clients.Skip to next paragraph
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Right now that scent is coming from an industry that's near and dear to the hearts of many ethically minded investors: education.
Earlier this month, President Bush signed legislation raising the limits on how much students can borrow in unsubsidized Stafford loans. That likely portends fatter bottom lines at for-profit institutions of higher education, whose stocks have been selling at discount prices during the recent credit crunch, according to Mr. Speer, who manages individual portfolios for Heritage Advisors, a financial planning firm in Overland Park, Kan. Higher education firms "are just going to have a tremendous cash-flow increase," Speer says. "Plus the recession is putting people back in school to get more training."
As commencement exercises this month spotlight the life-changing power of education, a breed of risk-tolerant investors is seeking new ways to capitalize on the learning process. They're finding public companies, from day-care operators to K-12 softwaremakers, that are aiming to satisfy unmet needs and return handsome profits in the meantime.
For investors, it's not an easy course. Neither mutual funds nor exchange-traded funds have bundled education-related stocks together for one-stop shopping or blanket exposure to the education industry. That leaves three basic options: stocks, bonds that support schools, or notes through financial institutions that bankroll educational ventures.
Of these three pathways, stocks pose the greatest chance to make – or lose – big money. What's more, critics say certain firms in for-profit education are amassing profits while failing to deliver on their lofty promises. Hence in both social and financial terms, this landscape can serve up land mines as well as gold mines.
Despite the risks, some investors are bullish on education. James Glassman, a senior fellow at the American Enterprise Institute in Washington, likes the prospects for firms that meet the marketplace's frothy appetite for affordable, practical learning. He has high hopes, for instance, for workplace day-care operator Bright Horizons (BFAM), private school operator Nobel Learning Communities (NLCI), and such higher education firms as Strayer Education (STRA) and DeVry (DV).
In his view, such stocks not only have a chance to rise substantially in value over a five- or 10-year horizon, but they're also positioned to serve the common good.
"This is an ethical investment because if we get the country's education problems straightened out, the benefits will flow disproportionately to people in the low-income segments of society," Mr. Glassman says. "So it's tremendously important."
But others bristle at the notion that for-profit higher education has been a blessing to American society. On the contrary, major players in the industry have routinely failed their students by admitting unqualified students and setting graduates up to default on loans when they can't get the jobs they've been promised, says Henry Levin, founding director of the National Center for the Study of Privatization in Education at Columbia University in New York.