Despite the growing interest in education on the part of businesspeople, policymakers, entrepreneurs, and venture capitalists, today's crop of education stocks remain at the bottom of the class. Some of the best-known, largest-capitalization education stocks, such as Sylvan Learning Systems (SLVN) and Apollo Group (APOL)), are trading well below where they were a year ago. And a few lesser-known companies, such as ITT Educational Services (ESI), CBT Group (CBTSY), and Children's Comprehensive Services (KIDS), have tanked by 50% or more this year on disappointing news. "These stocks are clearly out of favor and underperforming the overall market," says Scott L. Soffen, an analyst with Legg Mason Wood Walker.

This is radically different than 1996, 1997, and 1998, when education companies were "experiencing hyper growth and were solidly beating analysts' estimates," says Keith Gay, who oversees education investing at Thomas Weisel Partners. Over the last few quarters, many of these companies have merely reached analysts' estimates.

"The underlying demand is there for future education, training, and curriculum development"

Some investors believe that in the current tight labor market, people are finding good jobs without the benefit of additional coursework. But analysts think that trend will be short-lived. They point to the increasing wage gap between workers with advanced degrees and those with high-school degrees. Today, on average, college-educated workers make twice as much as those who completed only high school. "Enrollment growth is difficult to project and is going to move around," says Gregory Cappelli, an analyst with Credit Suisse First Boston. "But the underlying demand is there for future education, training, and curriculum development."

A GOOD BARGAIN. If you subscribe to his view, then stocks in the sector are cheap. Indeed, many analysts think they could turn around soon -- especially if enrollment perks up. "Valuations have gotten to a point where these stocks are attractive," says Soffen. "It could be that second-quarter earnings will spur stocks up and bring more momentum investors [those who latch onto stocks that are on their way up] back into the field." One thing is sure, Soffen says: "People are going to need more education, and they are going to need it more often."

Certainly, that's the mantra of a diverse set of education companies that offer everything from technical training to bachelor's degrees to day care. Most play in specific niches defined by age group -- early education, kindergarten through grade 12, post-secondary education, and corporate training.

In early education, one obvious choice is Bright Horizon Family Solutions (BFAM), which provides employer-sponsored day care and is recommended by both Gay and Michael Moe of Merrill Lynch. The company operates more than 280 centers nationally, all located on-site at companies. Bright Horizon has lower operating costs because of its company focus, but Gerald Odening, an analyst with Hambrecht & Quist, sees Bright Horizon as more of a business-service play than an education company. "We haven't yet seen a sustainable, successful day- care provider come public," he says.

GRADE-SCHOOL GROWTH. Investing opportunities in companies that serve K-12 students are still fairly limited. Well-known for-profit school-management companies, such as Edison Project and Advantage Schools, haven't gone public yet, although they are attracting private capital. Gay thinks a few companies like these could come public in the next 12 to 18 months. It is "the hottest area," he says.

Meantime, Sylvan Learning Systems, which provides a range of educational services that includes tutoring, test preparation, and training in English as a second language, focuses mainly on K-12 students. Soffen calls it the broadest stock in the education sector, meaning that it isn't overly dependent on any single student group. He also notes that Sylvan is attractively priced. Its earnings are rising at 30% a year, but its price-to-earnings ratio is only about 20 times his estimate for year 2000 earnings.

Gay's favorite K-12 stock is National Computer Systems (NCLS), which provides standardized testing, makes attendance and scheduling software for teachers, and recently acquired NovaNET, an online curriculum company. "It's a great play on K-12," says Gay.

Investors can find a much wider selection of companies in higher education. Hambrecht & Quist's Odening thinks public companies that offer degrees beyond college level generally have the strongest fundamentals. He recommends Argosy (ARGY), which offers masters and doctoral degrees in psychology, education, and business, and DeVry (DV), which offers accounting and management degrees. He also likes Apollo and Strayer (STRA), both of which provide graduate degrees through their universities.

For-profit universities serve the increasing number of students over age 24

For-profit universities -- as opposed to private universities like Yale and Princeton, which are set up as nonprofits -- tend to serve the increasing number of students who aren't the classic 18-to-22-year-olds whose lives briefly revolve around football, a dorm, and the library. "Those are things the over-24 student doesn't care about," says Gay. He favors Apollo, which runs the University of Phoenix and other graduate programs designed expressly for working adults. Although growth has slowed as Apollo's enrollment reached 80,000 nationwide, Gay believes it can increase 20% a year long-term, eventually hitting 200,000 to 300,000 students. Moe of Merrill Lynch recommends Apollo and DeVry.

Soffen's pick is ITT Educational Services, which aims to be the leading provider of information-technology education in the U.S. He upgraded it to a buy after it fell 40% following its disappointing first-quarter earnings release. Capelli also recommends this stock, along with Apollo, DeVry, Career Education (CECL), and Education Management (EDMC).

Few of the education analysts interviewed cover companies that offer corporate training. Some say that's because it is more a business service than an education play. But others say these stocks are less attractive than the degree-granting companies, partly because enrollment periods are so short -- often a week or two. Moe has a favorite, however. He recommends Provant (POVT) (see BW Online, 6/24/99, "Online Business Training: Provant Is Ahead of the Curve"). A play on consolidation in the industry, it was formed in a roll-up of a bunch of small corporate-training companies.

Education stocks are out of favor now. But if companies come in with solid second-quarter numbers and momentum investors return, they could move to the top of the class. That could make the current slump seem like a buying opportunity.

By Amey Stone in New York

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