Flunking Out - Zacks Industry Rank Analysis

Industry Rank Analysis 12-20-10

The for-profit educational industry is under attack. It receives a very high percentage of its revenues from students using government-backed student loan programs, and the dropout rates and default rates on those loans are much higher than the rates for either public, or traditional non-profit colleges. The Obama administration has been cracking down on them.

This had resulted in disappointing earnings performances in the third quarter, and analysts slashed their estimates for 2011. The related field of book publishing (textbooks are very high-margin items for the publishers) has also been showing weakness in earnings estimates. There the problem is more with strained State and Local government finances, which will probably lead many public K-12 schools to make do with last year's textbooks.

The Zacks industry classifications are very fine, with 255 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts.

We find it interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list.

The for-profit school (mostly college) industry is fairly large with 23 firms, although none of them are exactly mega caps. The industry is in 248th place of the 255 industries we track, an unusually poor showing for an industry with so many participants. It deteriorated by three spots over the last week. The average Zacks rank is 3.61, up (bad) from 3.52 last week.

The book publishing industry is a more average size with seven firms in it. It is currently in the 234th spot on the list of industries with an average Zacks Rank of 3.43. Both the average rank, and its place on the list were unchanged from last week.

The first table below shows the Education stocks that hold the dreaded Zacks #5 Rank (Strong Sell).  The second table shows the Zacks #4 Ranked (Sell) firms. Most of the firms are on the small size, and thus might be difficult to short, or not have options available to buy puts on them. For those names, simply avoid buying them.

While the P/Es on some of the firms -- especially on the “4” list -- look compelling, those P/Es are based on the current expectations for this year and next. Those expectations are falling fast, and an estimate in motion tends to remain in motion.

In other words, the actual earnings could be much lower, and thus the true P/Es much higher. That is sort of the classic definition of a value trap. Many of these firms have been poor performers in 2010; it looks like they could be underperformers in 2011 as well.

Number 5-Ranked Stocks

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Strayer Educ	STRA	$2,143	16.41	14.3	0.00%	-0.21%	$158.18
Capella Educatn	CPLA	$1,025	17.02	15.03	0.00%	0.00%	$62.00
Grand Canyon Ed	LOPE	$853	16.53	13.44	-0.96%	-0.55%	$18.65
Univl Tech Inst	UTI	$537	16.05	13.96	-11.07%	-14.70%	$22.11

Number 4-Ranked Stocks

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Wolters Kluwer	WTKWY	$6,508	10.84	10.55	-0.50%	-0.48%	$21.79
Wiley (John) A	JW.A	$2,753	16.15	14.15	-1.39%	-0.77%	$45.69
Itt Educational	ESI	$2,002	5.63	5.65	0.00%	0.00%	$62.72
Career Edu Corp	CECO	$1,587	7.47	6.91	-1.04%	-1.98%	$19.53
K12 Inc	LRN	$846	44.32	28.05	-8.86%	0.00%	$27.29
Corinthian Col	COCO	$376	4.9	10.59	-14.40%	-35.39%	$4.46
Archipelago Lrn	ARCL	$218	32.15	20.7	0.00%	0.00%	$8.28
Learning Tree	LTRE	$139	23.56	17.08	-14.71%	N/A	$10.25
Noah Education	NED	$81	N/A	N/A	0.00%	N/A	$2.04
China Educ Alnc	CEU	$79	4.27	3.32	-1.67%	-5.00%	$2.52
Princeton Rview	REVU	$57	N/A	N/A	0.00%	0.00%	$1.07

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
 
CAPELLA EDUCATN (CPLA): Free Stock Analysis Report
 
ITT EDUCATIONAL (ESI): Free Stock Analysis Report
 
WILEY (JOHN) A (JW.A): Free Stock Analysis Report
 
STRAYER EDUC (STRA): Free Stock Analysis Report
 
Zacks Investment Research