Thursday, September 23, 2010

COCO a Go-Go....

Since my recommendation to buy COCO (Corinthian Colleges) and WAPO (Washington Post) on 08/16/2010, both stocks have increased in value by a substantial amount (+25%, vs +5% for the S&P 500). At its peak today, COCO was up more than 36% over the past month.

As it turns out, the Education Secretary Arne Duncan announced they were "keeping their options open" and that final DOE regulations could be delayed. This should lead to significantly more upside in both COCO and WAPO.

Previously, I laid out a number of potential problems with the bear-case, which included skepticism that: 1)Racially-divisive gainful-employment rules go into effect on schedule without any changes 2) Belief that upcoming Congressional elections might create uncertainty about final rule adoption (Republicans want to extend oversight of not-for-profits, not just for-profits) 3)Current valuations imply that COCO/WAPO shutter their entire programs overnight, giving zero credit to ancillary programs (Heald College) or foreign programs (17% of assets in Canada)

Essentially, if you priced a business at liquidation value (i.e- 2-3 earnings and below tangible book value then suddenly decide suddenly that the business will live a little bit longer... you will have made a huge mistake selling-out and materially underpriced the value of the franchise. There is uncertainty in all human endeavors and perhaps an above-average level of uncertainty in federal funding, but with 30% of the company's shares shorted and the forward business value priced near zero.... I believe the pessimists are over-confident in their analysis to the point of arrogance.

Remain long COCO ($6.50) and WAPO ($375), in spite of my disgust of for-profit education stocks.

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