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.

Where There Is Smoke, There Is Fire

Excellent Weekend Interview in the WSJ, highlighting the rot (basically poor structure, corrupt practices, and perverse incentives...sound familiar) that exists within the US legal system ("He Fought the Tort Bar - and Won").

Given our recent experience of an unsustainable imbalance (financial crisis), it reminded me of the importance of identifying other areas in the system that are rotten. These will be ruled by Stein's law "if something can't go up forever, it will stop."

There is a price to be paid for corruption. And, there is a day of reckoning. Getting a handle on how and when it will play itself out is the hard part. But first you must identify where the problems lay.

Here are a few suggestions of unsustainable imbalances:

Political/democratic process and systems - perverted by money
Healthcare - perverted by vested interests
Tertiary Education - 10% pa inflation unsustainable
Defense spending - military/industrial complex + political ideology
Unfunded Entitlement Liabilities - self-evident
Fiscal Deficit, Current Account Deficit, Govt Indebtedness - not sustainable, but...

I think that each will have their "Minsky Moment" but the damage from their fallout, in most cases, will be less severe than an overly leveraged financial system (the multipliers there are huge).

I will talk much more about these things at another time, as well as possible ideas as to how each of their unravelings may play out.

P.S. While we are essentially on the subject of systemic risk factors, here are two other substantive risk factors with systemic possibilities - inflation and deflation. More on those at another time also.