How investors can earn by helping others learn

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

Scott Wallace - staff

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.

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.

"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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