VERSACE: Schools profit as workers update skills

ANALYSIS/OPINION:

Corporate earnings continued at a fast and furious pace this week, and we started to hear from a wider variety of companies.

Again, however, it was a mixed bag. Solid earnings and outlooks from the likes of Apple Inc., Qualcomm Inc., Morgan Stanley and eBay Inc. were offset by disappointing earnings, outlooks or both by Yum Brands, Starbucks, IBM, Goldman Sachs Group and others. This resulted in a topsy-turvy stock market, which should be expected. Not only is that one of the trials and tribulations of any earnings season, but it is amplified by where we are in the domestic economic recovery.

Or not.

While some may cut to the quick and ask, “How can he say that?” I would quickly point to Federal Reserve Chairman Ben S. Bernanke’s semiannual report to the Senate Banking, Housing and Urban Affairs Committee on Wednesday. At the heart of Mr. Bernanke’s testimony, he stated that the Fed continues to forecast moderate growth for the domestic economy this year despite a “somewhat weaker outlook.”

Mr. Bernanke went on to pronounce the outlook as “unusually uncertain.”

As I pondered this, I was reminded of another two words used by Mr. Bernanke’s predecessor, Alan Greenspan, in late 1996 when he warned of extended valuations in the stock market. His two words, as many will remember, were “irrational exuberance.”

One has to wonder whether Mr. Bernanke’s catchphrase of the moment will be as well remembered.

Moving along, in Mr. Bernanke’s prepared testimony, he shared expectations for the unemployment rate to decline to 7 percent to 7.5 percent by the end of 2012 and that “in all likelihood, a significant amount of time will be required to restore the nearly 8.5 million jobs that were lost over 2008 and 2009.” This slow recovery of the labor market is an “important drag on household spending.”

He also warned of the potential erosion of skills, which could translate into long-lasting effects on employment and earnings prospects.

That testimony, much like when Mr. Greenspan uttered “irrational exuberance,” sent the stock market into a nose dive Wednesday afternoon. We have received ample economic data to conclude that the second half of 2010 likely will post slower economic growth overall than the first half.

But let’s return to the top of this week’s column — there are companies that are thriving in this economy. Being the Thematic Investor, I would argue that those companies are capitalizing on an economic, demographic, social, technological or other shift in the marketplace.

With that in mind, let’s revisit Mr. Bernanke’s concern that worker skill sets may erode. I have to agree that this is a major concern, particularly if we consider where jobs are compared with where prospects are for job growth. Consider the job destruction that has hit the auto manufacturing and assembly industry compared with the new area of job growth touted by President Obama — renewable energy. Is there a high degree of overlap between these two industries?

The answer, at least in my mind, is a resounding “no.” To me, this means one of two things: Either we will have a higher degree of unemployment for a longer period than we have experienced in past recoveries, or workers will need to retrain. The latter strikes at the heart of my education — the tooling and retooling theme bodes well for for-profit education companies. There are two major types of for-profit schools. One type can be described as educational management organizations, which are primary and secondary educational institutions. The other category of for-profit schools involves postsecondary institutions, which operate as businesses, receiving fees from each student they enroll.

Some quick Googling reveals that there are more than 165 for-profit education companies and more than 125 for-profit universities and colleges. Sen. Tom Harkin, Iowa Democrat and chairman of the Senate Health, Education, Labor and Pensions Committee, recently issued a report on the for-profit education market. Per Mr. Harkin’s report, the number of students attending for-profit colleges rose to 1.8 million in 2008, from 550,000 in 1998. The report cited data from the Education Department showing that federal aid to for-profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000. A growth industry indeed and one that is likely to continue given the need to retool and update worker skills.

As we strap on our investor caps, the next logical question is: “How many are publicly traded that I might be able to invest in?”

There are more than a few — Capella Education Co., Strayer Education Inc., Grand Canyon Education Inc., Career Education Corp., Corinthian Colleges Inc., DeVry Inc., and another 25 or so from which to choose. As always, this is where the homework begins in terms of understanding an investment prospect’s industry and competitive position, revenue and earnings growth prospects, stock price valuation and more. As I have mentioned in the past, buying blind can be painful, so roll up your sleeves and do your homework.

Good hunting.

• Chris Versace, the Thematic Investor, is the director of research at Think 20/20, an independent equity-research and corporate-access firm located in the Washington, D.C., area. He can be reached at cversace@washingtontimes .com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.