Education Stocks Are About To Collapse

Jim Chanos is the world’s best short seller.

Most investors like to pick stocks they think will rise. Short sellers pick stocks they think will fall. Enron is Chanos’ most famous short sale. Chanos knew Enron was a broken company before the stock market. His “short sale” of Enron made a fortune when the stock collapsed… and made him famous on Wall Street.

Jim Chanos is a smart guy and he’s made a lot of money for his investors. Here at DailyWealth, we always pay attention to his investment ideas… as they are almost always profitable.

Right now, Jim Chanos is selling short the for-profit education business.

“Kids are graduating from these schools,” Chanos says, “with associate and bachelor degrees… and running up $30,000… $40,000… $50,000… $60,000 in debt. In many cases, the cost of these diplomas is the cost of Ivy League diplomas. Some of these kids don’t find themselves any more employable with one of these degrees than beforehand.”

The federal government offers subsidized loans to help students attend these institutions… But the problem is, the fees these schools charge are so high, students need to augment their government loans with private financing. Many of these private loans defaulted in the credit crunch… and it’s created a large financial mess.

Chanos thinks these firms are going to have difficulty recruiting students now that the students can’t get financing to pay the high tuition fees… and he’s shorted the stocks of several of the companies in the sector.

There’s no ETF for the secondary education sector… But check out Apollo (APOL). As my colleague Brian Hunt pointed out yesterday, Apollo is the “bell cow” of the for-profit education industry. With a market capitalization of $11 billion, Apollo is an excellent proxy for what’s going on in the sector as a whole.

On April 1, Apollo reported solid quarterly earnings. Revenues were up 26% year over year, and Apollo beat analysts’ estimates of both sales and profits. The stock plummeted 16% on high trading volume.

As I explained on Monday, it’s an incredibly bearish sign when a stock reports decent earnings and gets clobbered for its trouble. It shows the line of least resistance is down.

Last week, the stock market showed strength. The S and P 500 rose 5% on Wednesday and Thursday. While the bulls were charging stocks higher, Apollo’s stock was declining 3%. It may not sound like much, but this divergence shows immense weakness in Apollo’s stock.

Since its big earnings drop, Apollo is down 9% in the seven trading sessions. Most importantly… the 22% total decline has led to a new five-month low in Apollo’s stock price.

This is a textbook example of a stock “acting poorly.” The charts of other for-profit educators like DeVry, ITT, Career Education, and Corinthian Colleges are showing same patterns of poor action and multimonth breakdowns.

The world’s best short seller is bearish on for-profit education. And the stock prices are breaking to new lows as the S and P rises… It’s likely this sector will see a big move lower.

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