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When markets are falling, writes Dianne F. Lob, of Bernstein Global Wealth Management, in a recent letter to clients, "it's only natural to want to 'do something.' But while trying to time markets may sound like an alluring strategy, it is almost impossible to get right." So what are you to do? I suggest you invest part of your portfolio, right now, in industries of the future, not those of the present.
Educated guess
Which sectors will thrive over the next decades? Technology, of course, but there are drawbacks. The industry is super-competitive, choosing individual winners is difficult, and volatility is extreme. In 1949, Benjamin Graham, Warren Buffett's mentor and the best financial mind of the 20th century, wrote that it wasn't hard to predict that Americans would be doing a lot of flying on commercial airplanes. But he was skeptical that airlines, which were intensely competitive and required huge amounts of capital for new equipment, would be good stocks to buy, and he was right. High-tech today may fit the airline model.
What about health stocks? An aging America will need more drugs, medical devices and hospital care. But will health-care shares be able to overcome serious political risks?
That leaves education. In an age when human capital keeps growing in importance, education is the best investment for individuals who want to increase their earning power. Again, there are political risks -- not that government will depress earnings through taxes and regulation, but that government, through tax-funded schools and universities, will use its monopolist position to compete with for-profit education firms.
Even so, I've liked for-profit education stocks for a long time. In 1995, I wrote in the Washington Post, "My candidate for the hottest industry in 2005 is education." On February 1, 1995, Apollo Group (symbol APOL), the strongest player in the industry, traded at a price of $1.32 a share, adjusted for later splits. Ten Februaries later, the stock was at $80, which is roughly where it remains. In the parlance of Peter Lynch, the former manager of Fidelity Magellan fund, that's a 60-bagger.
Not all education stocks have done as well. Companies lured into the business of managing public schools under contracts with local education authorities -- such as Education Alternatives and Edison Schools -- got clobbered. Education Alternatives changed its name to the Tesseract Group and later filed for bankruptcy.
Edison, founded with great fanfare in 1992 by former magazine publisher Christopher Whittle, intended to start a chain of low-cost private academies. When Whittle couldn't make the numbers work, he turned to managing public schools, took Edison public, lost a lot of money, then was rescued in a buyout by a Florida pension fund in 2003. Most investors were big losers. But Whittle and his partner, Benno Schmidt, a former president of Yale, have persevered. The now privately held firm served nearly 300,000 students last year, providing such services as tutoring for children in failing schools.
More typical of education companies over the past decade is Renaissance Learning (RLRN), which sells educational software to secondary schools. The firm, started by a husband-and-wife team in Wisconsin in 1986, went public in September 1997 at $6.50 a share and was trading at roughly double that price in February. Renaissance, like most education firms, is small, with revenues of about $100 million and a market value of $400 million. But the company has no debt, has been profitable every year since the IPO and even pays a dividend (the stock yields 2%).
Established winners
These examples illustrate the breadth of for-profit education. Apollo's business is to instruct people who have already joined the workforce but want to earn a bachelor's or advanced degree. Its main brand, University of Phoenix, is the largest for-profit university in the U.S., with about 100 campuses and an extensive system for online teaching.
DeVry (DV) and ITT Educational Services (ESI) also compete in this sector, with slightly different target audiences. All three have done well. DeVry's stock rose 92% for the 12 months to February 1, and ITT has more than tripled over the past five years. Both stocks have a market value of a little less than $4 billion, while Apollo's is about $12 billion. All three are established companies in a market that will continue to grow faster than the economy. Value Line Investment Survey estimates sales increases for each of about 10% annually for the next five years, with earnings rising a bit faster.
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