San Diego–based Bridgepoint Education, the for-profit online school that spends more on marketing and promotion than it spends on education, may now be escalating efforts to pump up its stock.
It seems to be doing such a masterful — if extremely dubious — job that if I shot craps in the market (and I don’t), I might gamble on Bridgepoint stock. Are you shocked? In numerous columns and blog items, I have consistently characterized the company’s ethics as…well…crappy. But if you’re rolling the dice in stocks, you don’t care about the quality of a stock or the probity of the company’s management.
Bridgepoint pulled a slick one the last week of January. For several years, investigators from the U.S. Department of Education have been probing the student-recruitment techniques of Ashford University, Bridgepoint’s major school, in which 99 percent of the students are online. The results came out early Monday, January 24. The thrust of the government’s report was negative — in fact, the investigators warned that in the worst-case scenario, Ashford could lose all its government loans and grants. Since they account for 85 percent of Bridgepoint’s revenue, the company could be finished.
But Bridgepoint issued an immediate news release saying it was pleased that the government had “narrowed the scope” of several findings in its initial report and had made “significant reductions” in earlier recommendations. That might have been true, but taken as a whole, the report was biting. Investigators concluded that Ashford’s recruiter compensation was based on number of enrollments and didn’t meet government requirements; the university didn’t properly perform federal student-aid calculations, didn’t return funds promptly, retained students’ credit balances without authorization, and didn’t provide documentation for students’ leaves of absence. Because of the “seriousness of the findings,” investigators warned that there could be fines, limitations, suspension, or even termination of the company’s participation in federal aid funds.
But the day of its deftly spun statement, Bridgepoint’s stock soared more than 5 percent, and it zoomed more than 3 percent the following day. The major reason was probably that short sellers, who bet that a stock will go down, were rushing to “cover” their shorts by buying Bridgepoint shares. Before the announcement, half of Bridgepoint’s trading shares were short — in effect, half the money in Bridgepoint stock was hoping it would go down. That is extremely high. And, perversely, having a large number of shares short is often considered bullish. That’s because when something good happens to the company, the shorts will rush to “cover” — that is, buy the stock and get out of their short positions. It’s often a stampede, sending the shares soaring.
Ken Cavalli, a New York analyst who is bullish on Bridgepoint, says that last time the short ratio got around 50 percent, the stock soared to $28. On Monday it was trading at $18.55.
Cavalli points to Bridgepoint’s astonishing growth rate. Revenues were $7.95 million in 2005 and should hit $871.3 million this year. But the stock sells for only 9.49 times earnings — well below the multiple of the average stock these days. “The net profit margins are close to 18 percent; the average company in America is 5 percent,” says Cavalli. Taking various statistical measures into account, “You’re getting four times better than the average company at one-third the price,” he says, noting that Bridgepoint has an amazing $230 million in cash.
So how did Bridgepoint get so rich? And why have investors been reluctant to buy the stock? The reason: there is a feeling among thought leaders that Bridgepoint and many of its for-profit confreres have been raking in taxpayer money while providing an inferior education. For example, Senator Tom Harkin, Democrat from Iowa who heads the Health, Education, Labor, and Pensions Committee, notes that in 2008 students at for-profit schools accounted for 10 percent of those in college and racked up a shocking 44 percent of loan defaults.
Bridgepoint is Harkin’s favorite target. In a December speech on the Senate floor, Harkin said that 84 percent of Bridgepoint students seeking two-year degrees dropped out before they completed the first year. The next highest dropout rate for such students at for-profit colleges was 69.9 percent. “And 63 percent of bachelor’s degree–seeking students leave Ashford within one year, without finishing their programs,” said Harkin. In the fall of 2009, Bridgepoint signed up 48,000 students. Over the school year, Bridgepoint recruited another 77,000. So during the year there were 125,000 enrollees, but at year-end there were only 67,000, said Harkin. Half “didn’t stick around. They were out the door,” said Harkin.
“What do you think happened to their [federal] loans?” asked Harkin indignantly. Or their grants? “Students get those back? Not on your life. Bridgepoint kept them; the money went to their shareholders.”
Federal tax money flows to Bridgepoint and other for-profit schools, but too few students finish their courses, and those who graduate find it hard to get jobs. That’s why the default rate is so high.
And that’s why the investment community has been shy to embrace these stocks, despite the sky-high profits that companies like Bridgepoint post.
The Department of Education is cracking down. On July 1, new regulations are scheduled to go into effect. One would bar schools from paying recruiters according to how many students they enroll; another would stop deceptive advertising; a third would require schools to measure defaults more accurately. Implementation of the most controversial one, the “gainful employment” rule, has been delayed as the industry has aggressively lobbied Congress. This proposal would tie eligibility for federal aid to graduates’ incomes and loan-repayment rates. The rule could cripple many for-profits.
An industry trade group announced January 21 that it is suing the federal government in an attempt to overturn the proposed rules. One self-proclaimed watchdog group asserts that by proposing the regulations, the Department of Education is trying to help the short sellers. The department says the assertion is “patently ridiculous,” and that is the truth; bumpkins — including many in Congress — consider short sellers to be antipatriotic. No government agency would try to help them.
The watchdog group should study what happened to Bridgepoint stock. Short sellers can be a company’s best friend when they panic and cover their positions.
Cavalli, the bull on Bridgepoint stock, is realistic. “It’s risky, not for the faint of heart,” he says. Bridgepoint has been overaggressive in marketing to students who can’t succeed, he admits. But he thinks the stock can go to $35 or higher.
Opinions are mixed. On September 15, Sean Wright of the publication Seeking Alpha said Bridgepoint was “deeply undervalued” and shouldn’t be hurt by new regulations. But on January 16, David Sterman of the same publication said Bridgepoint was still a good short.
However, the Obama administration has definitely grown friendlier toward business and warier of regulation. Even though the Department of Education study roundly denounced the company’s practices, if there is a softening of regulations, more Bridgepoint shorts could soil their underdrawers and push the stock higher.