Monday, November 13, 2006
Last week’s political shift will have serious consequences for the for-profit school sector...
For-profit schools have been some of the best investments in the past years. Revenues soared as new-student enrollment hit record levels. And the bad aura surrounding the sector – namely several investigations by the Securities and Exchange Commission – has been dissipating.
Most notable was ITT Educational (ESI), which emerged from both an SEC investigation and a U.S. Department of Justice investigation unscathed.
Even better, the political atmosphere surrounding the for-profit school sector was bullish as well. The Higher Education Act was up for reauthorization in Congress. And both the Bush administration and congressional Republicans were pushing to alter it to increase business in the for-profit sector.
One proposed change would have ended the 50% rule: legislation that demands at least 50% of a school’s instruction occur in a classroom setting in order for the institute to receive financial aid. With for-profit schools offering a significant portion of their classes online, this amendment would greatly increase financial aid to this sector.
Other amendments included a move that would force traditional colleges and universities to recognize credits from postsecondary degree programs and a move to make some programs 100% online. All in all, the proposed changes could have freed up several billion dollars in government financial aid to for-profit schools.
The two members of the House who were sponsoring these changes – John Boehner (R-OH) and Howard McKeon (R-CA) – have both kept their seats. Both of these guys have received large contributions from for-profit education businesses, so you can be sure they’ll continue to push for the sector.
However, the Senators who were championing the cause – Mike DeWine (R-OH) and Rick Santorum (R-PA) – both lost their seats. And with the Democrats in control of both the House and the Senate, the Higher Education Act will probably not benefit the for-profit school sector by much.
These changes have prompted investing legend Richard Blum, chair of Blum Capital Partners, to make a dash for the exits. On Wednesday, he dropped over $206 million worth of ITT Educational’s stock, reducing his holdings from 16% to 9% of the shares outstanding.
Blum’s no idiot. Aside from being one of the most successful investors of our time (he more than doubled his money with ITT Educational), he’s also married to California Senator Dianne Feinstein (D-CA).
If he’s selling, you better believe that the new Congress is not going to favor for-profit education.
To be sure, you could still find a great company in this sector. But make sure its fundamentals are in order. Uncle Sam is done making handouts.
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