Why For-Profit Education Stocks Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of for-profit education companies were moving to the head of the class today after strong earnings reports from Grand Canyon Education (NAS: LOPE) and Bridgepoint Education (NYS: BPI) . Grand Canyon was up by as much as 27%, while Bridgepoint added as much as 17%. Education Management (NAS: EDMC) , Corinthian Colleges (NAS: COCO) , and Apollo Group (NAS: APOL) were all also in positive territory, with Education Management up nearly 14% as of this writing.

So what: The upside for Bridgepoint was in its better-than-expected second-quarter earnings, delivering $0.84 against Wall Street's consensus view of $0.74. The company did, however, suspend its full-year guidance, due to the accreditation issues it's run into recently.

Grand Canyon Education's second-quarter report was even more bullish. The company beat analysts' estimates on both the top and bottom line, notching $0.35 in earnings per share on $119 million in revenue, against expectations of $0.27 in per-share profit on $115 million in revenue. Better, still, the company also raised its full-year guidance, bringing its earnings-per-share forecast to a range of $1.36 to $1.41. Analysts had been looking for $1.28 in per-share earnings.

Now what: This has been a challenging sector for investors, as regulators have cracked down, leading to drastic hits to growth. Companies in the industry are now trying to revamp their businesses to comply with regulators and put them on a more sustainable path, but it's still unclear what that will mean for growth, as well as long-term profitability.

For some companies, though, very significant hurdles are still ahead. For Bridgepoint, for instance, recent challenges from accreditation bodies have threatened to restrict the company's access to government student loans. Though it will have an opportunity to address the accreditors' concerns, the accusations -- such as the claim that the school spends more on marketing than educating -- are very serious.

Valuations in the sector look particularly cheap, which helps fuel big gains when good news is announced, but investors need to be careful to dig in and understand the individual businesses when jumping in here.

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