When Apollo Group (APOL -3.30%), the parent company of the University of Phoenix, recently announced plans to shutter 25 campuses, investors might have thought that all the bad news had been priced into the stock. That view was proven wrong Wednesday.
Shares of the Phoenix company plunged nearly 7% to $19.89 in a rout of the for-profit education sector. Other stocks, including ITT Educational (ESI -3.95%), DeVry (DV +0.61%) and Career Education (CECO -14.08%) also dropped on the first trading day after the re-election of President Obama. During the campaign, Obama promised to continue a crackdown on for-profit colleges, which critics have long alleged charge exorbitant tuition, have high drop-out rates and do not adequately prepare students for today's workforce. Obama likely will keep his promise. As The New York Times noted, the Administration has already forbidden colleges from tying recruiters' bonuses to the numbers of students they enroll.
Earlier this year, Sen. Tom Harkin (D-Iowa) issued a scathing report on the industry that noted, among other things, most of its profit comes from the federal government via aid such as subsidized loans and grants. Only 17.2% of expenses are used for "actual instruction," the report said, adding that the average CEO of an institution earns $7.3 million. Another study found that graduates of for-profit schools earn less than colleagues from other institutions.
The negative publicity and changing demographics -- enrollment growth at lower-cost community colleges is slowing -- has pushed down enrollment at for-profit colleges for six straight quarters. Furthermore, the improving job market will only depress the demand for career training even further.
Though some investors may be tempted to buy into the sector because of cheap valuations, they will probably experience lots of pain for little gain. These stocks should be avoided at all costs.
--Jonathan Berr does not own shares of the listed companies. Follow him on Twitter @jdberr.
More from Top Stocks
Is Obama priced to the selloff?
Focus on earnings, not fiscal cliff
In 2013, Apple and Facebook will fly, Intel will die