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The Reformed Broker

College dropouts and their now-profitless shareholders

'For-profit' colleges and universities, like DeVry University, ITT Technical Institute, and the University of Phoenix, face stock market losses as grads and dropouts default on student loans.

By Joshua M. BrownGuest blogger / October 14, 2010

The for-profit education sector took a heavy hit on Thursday. Students are defaulting on loans at every level, but loans to for-profit schools hit not only banks but the schools' stockholders, too.

Joshua M. Brown / The Reformed Broker

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The above bludgeonings are just from today. Seriously.

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The for-profit education sector now has a bunch of not-for-profit shareholders.

In hindsight, owning these stupid stocks was a disaster waiting to happen. I can't imagine what kind of convoluted investment thesis would've had anybody long these names.

The case against them, however, was a no-brainer:

  1. If people can't pay their mortgages, car leases and credit cards, did you really think they would give a damn about their student loans?
  2. I posted the list of unemployed MBA students from Wharton, Yale etc the other day - nobody cares what school you went to when they themselves are about to be laid off.
  3. Did I mention the student loan thing? The default rates I'm hearing about are somewhere around 7% so you can probably double that.
  4. These companies are among the most aggressive marketers on the planet. My friends in the online lead-generation business are literally frightened of them. Supposedly, they make the online credit fix people look like pussycats.
  5. This has always been a historically shady industry. Apollo's withdrawal of financial guidance today is just the latest event in a parade of lawsuits, investigations, restatements etc for the for-profit education names.

Herb Greenberg over at CNBC NetNet has been all over this story, props are due. Those looking to play an oversold bounce should do some homework first. You may get that bounce but the risk of being stuck may not be worth it given the state of the industry.

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