An Entire Industry in Denial
This past weekend, the Motley Fool Money radio show featured best-selling author Jim Collins. Knowing that he was going to be a guest, I went to my bookshelf and dusted off a copy of one of my favorite Collins books: How the Mighty Fall.
The book details the five stages of decline that once-great companies go through during their fall from grace. Monday, I detailed Stage 1: hubris born of success. Yesterday, we covered Stage 2: the undisciplined pursuit of more. Today, we'll be dealing with the third stage, and the industry in our crosshairs: for-profit education.
Stage 3: denial of risk and peril.
At the end of each chapter, Collins quickly summarizes the key symptoms to diagnose whether a company is in a certain stage of decline. Though I don't list all of the symptoms, a quick read-through will make it clear why I think the industry is in trouble.
Symptom No. 1: amplifying the positive while discounting the negative.
Sometimes, even investors are willing to amplify the positive while discounting the negative.
Take today's earnings announcement from Apollo (NAS: APOL) , parent of the University of Phoenix, as an example. Apollo announced that while margins went from 11.3% to 20.6% (a very good thing, no doubt), the company was continuing to bleed students, with enrollment down 19% and new-student starts down a whopping 33%.
How have investors reacted to Apollo's earnings release today? Shares were trading up by as much as 9%! Some things will never cease to amaze me.
Symptom No. 2: externalizing blame.
This has been something that CEOs of for-profit education have gotten very good at.
Earlier this year, during one of his conference calls, Strayer CEO Robert Silberman blamed a whopping 20% drop in enrollment on ... bad press. This response failed to addresses the Department of Education's concerns about low graduation rates and a high level of federal student-loan defaults.
Symptom No. 3: imperious detachment.
I've written extensively on why I think for-profit education is doomed: I don't think the schools add enough value to students' prospects to justify the tuition. However virtuous their stated intentions, all too often schools simply saddle disadvantaged students with more debt that they could ever handle. They don't seem to get this. Consider that more than 38% of Corinthian's students have defaulted on their federal loans within three years of graduating:
Sadly for students, this turns the maxim of the importance of education on its head, as their foray into higher education leads to more difficult circumstances later in life.
It reminds me of a study done on 2006 mortgage data compiled by the Center for American Progress. The study found that Bank of America (NYS: BAC) , Wells Fargo (NYS: WFC) , Citigroup (NYS: C) , and JP Morgan Chase were charging significantly more to black and Hispanic customers than they were their white and Asian ones, leading to charges of predatory lending.
And with this week's presentation at the Value Investing Conference by famed hedge fund manager Jim Chanos, some parallels were drawn. He called the entire industry a "national shame," saying, "I can't think of a more predatory business."
The big picture
If you've read my articles on for-profit education before, you're familiar with my thoughts on the subject. Simply put, your money could be placed in wiser investments that add real value to our society.
Following in that vein, I encourage you instead focus on dividend stocks. Study after study shows that, over the long-run, dividend stocks are the way to go to save up for retirement. The Motley Fool's brand new special free report -- Secure Your Future With 11 Rock-Solid Dividend Stocks -- is the perfect place to start. Inside, you'll get the names of companies that can usher you through to retirement. The report is yours today, absolutely free!
At the time this article was published Fool contributorBrian Stoffelowns no shares in any of the companies mentioned. You can follow him on Twitter at @TMFStoffel. The Motley Fool owns shares of Citigroup, Wells Fargo, JPMorgan Chase, and Bank of America. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.