For profit educators cratering

http://www.marketwatch.com/story/for-profit-education-stocks-plunge-2010-08-16

I called this last year:

http://gregnguyen.blogspot.com/2009/03/educators-cratering.html

http://gregnguyen.blogspot.com/2009/04/short-squeeze-vs-selling-panic.html

For-profit educators getting pummeled

Making money on the short side is certainly easier in a bear market. Apollo Group (think University of Phoenix) shares tanked overnight DESPITE beating earnings estimates and enrollment increases by a long shot. My May, August and January put options soared as a result. I closed out my May puts due to expiration next month, but I kept my August and January puts in case this stock drops further. After some due diligence, there are way too many lawsuits and scrutiny into their sales practices and accounting of student loan revenue. The new Obama administration won't take kindly to any accounting irregularities. As I don't want any scrutiny, please Google "Apollo Group Citron".

Educators Cratering

My put options on a for-profit education company gapped up big on Tuesday, as concerns about fraud and business practices surfaced. My investment thesis about these educators remain intact: students are better off attending junior colleges as they avoid the $70,000 student loan debt they incur by attending these for-profit schools. If they are going to shell out that type of tuition dollars, they are better off attending accredited universities. While I won't go so far as to declare these for-profit schools scams, I will say job prospects for graduates are sketchy at best. Factor in a tough job market, and you can imagine their ability to repay these massive student loans is minimal.

These company stocks have had a long, explosive two-year run up, against the backdrop of a declining stock market. The conventional wisdom is that these schools thrive as unemployed individuals go back to school, seeking to upgrade job skills. This prevailing investment thesis has worked, but the run is over, as graduates face a rising probability of defaulting on these student loans.

I normally don't short shares, as your losses can theoretically be unlimited if stock prices keep climbing, but I have used put options to limit my losses. Even if the time value of options decreases, puts and calls allow investors to realize much bigger profits. Having said that, the put options have been immensely profitable, because the price declines have been swift, as the price action has broken support levels.

I would posit that put options on the market overall have been very profitable. I chose to short this educational segment due to:

1) overall market weakness: if a rising tide lifts all boats, a receding tide sinks most boats.
2) this for-profit educational sector has had a terrific run up the last 2 years
3) this sector looks especially vulnerable fundamentally due to lack of government subsidies going forward, questionable sales practices, poor value proposition education-wise
4) poor price action and volume technical indicators
5) and most damning, heavy selling by company insiders.

When the company's biggest supporters and executives are selling their own shares at high prices, the average investor should sit up and take notice.