Burned Out For Profit Education Sector Set To Run

Been looking at a few names in the burnt out for profit education space.

I think it will recover - maybe not to its former glory (read that profit margins and growth rates) - but it will survive and live to fight another day. Which means at current valuations most of the stocks in the space are really cheap.

The sector recently staged an impressive rally off the bottom. The interesting thing is that enrollment data has continued to decline. When a market rallies this strong from such a low valuation on no tangible information, it indicates to me that the bottom trollers have put their hooks in and are getting in ahead of the crowd. I expect the sector to see a turnaround in enrollment fortunes in 2014 which should propel it higher (depending upon how much it has already rallied in the interim).

Make no doubt about it, this sector is scary risky. From massive regulatory overhang to no sign of recovery, it is not for the faint of heart. Despite offering up tremendous value from a contrarian perspective, it may not be appropriate for a long term investor looking for good quality companies. Fundamentals are still declining and things look bleak on the surface. It is only under the surface when you look at the potential and the value being attached to assets that have enormous operating leverage, that you see something positive.

As a long term investor you always need to remind yourself that you really want to own good quality companies, in good industries, with good tailwinds. The for profit education sector does not offer those characteristics. But for contrarian value investors, it offers up an attractive profile.

On a final note. I have a lot of disdain for the sales and marketing practices of these firms. I don't like the way they do business. I don't like how they operate. They do however have a great business model (at least it use to be great). It is an ethical dilemma to invest in an industry/sector where they operate in a manner that you don't like but where there is tremendous value in the businesses who operate in the space.

Another Good Point - Seize the Opportunity

Seize any opportunity, or anything that looks like opportunity.

They are rare, much rarer than you think. Remember that positive Black Swans have a necessary first step: you need to be exposed to them.

Good Point from The Black Swan

Do not try to predict precise Black Swans - it tends to make you more vulnerable to the ones you did not predict.

Rather...

Invest in preparedness, not in prediction.

Where did we get our stomach for risk

It amazes me the gutsiness of the guys who sit on prop desks, or at hedge funds making market bets with 20x-30x-40x-50x leverage. I don't know how they do it! One wrong move and it all goes poof.

Is it ego? Is it hubris? Is it bravado? Is it incentives? Is it stupidity? Is it madness? Is it skill? Is it luck? Is it greed? Is it insecurity? Is it peer pressure? Is it culture? Is it ambition? Is it hope? Is it faith? Is it the will-to-power? Is it immaturity?

The one thing they invariably have in common is that it is someone else's money.

This penchant for risk among our financial superstars has slowly, but insipidly made its way through the system. To the point where modern Anglo-Saxon economies are a mere shell of their former financial selves.

One way or another change is coming. It may be through enlightened cultural norms (don't count on it), more likely it will be through enlightened self-interest brought on by economic necessity.

The choice is ours (if only there was leadership to help navigate the waters). We can either take our medicine now (manifest in a deep recession) or we will experience something a lot less savory later.