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Embedded below is a sample of their research on the for-profit education stocks from May:



You can download a .pdf sample here.

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Response to Steve Eisman's Short Thesis on For-Profit Education Companies

You'll recall that MarketFolly.com recently provided a summary of the Ira Sohn Investment Conference where numerous prominent hedge fund managers presented their latest ideas. Among those presenting was Steve Eisman of FrontPoint Partners. You might remember him of course as one of the successful subprime traders profiled in Michael Lewis' latest book, The Big Short.

At the conference, Eisman presented a short thesis on for-profit education companies, interestingly titled 'Subprime Goes to College'. You can view the entire presentation through that link, but he essentially laid out a bearish view on the following companies: Apollo Group (APOL), ITT Educational (ESI), Corinthian Colleges (COCO), Education Management (EDMC), as well as the Washington Post (WPO) for its test preparation business. His thesis states that the industry will be hurt by two factors: increased government involvement & regulation, as well as a rise in employment (generating a decrease in enrollment).

Eisman's crusade against for-profit education companies has obviously lit a fire under the collective asses of said companies' executives and representatives of the industry. Courtesy of our buddy StockJockey, we see that Harris Miller, President and CEO of Career College Association has even gone as far to pen a response to Eisman. Unfortunately, Miller's retort falls short (no pun intended) right from the get-go when he immediately casts Eisman as a villainous short-seller not even one paragraph into his remarks. This rudimentary and almost Pavlovian response from various officials and executives has become a bit tired over the years, has it not? 'Oh, he's a short seller, that means he's a bad person and must be stopped at all costs!' Nevermind the fact that Eisman, you know, has some credibility in the arena of short selling. He predicted this little thing called the subprime mortgage mess. Maybe you've heard of it?

In fairness to Miller, the CEO does bring up a solid point that comparing education companies to subprime mortgages is indeed a bit of a stretch. There are some similarities between the two situations (ratings agencies/accreditation boards, etc), but the insinuation that for-profit education is the next subprime is a bit hyperbolic. While there is government involvement in both sectors and student loan default is a legitimate concern, let's be honest: for-profit education is not going to wreak near the amount of havoc the subprime mess has. At the same time, there are obviously problems in the industry as Eisman has detailed.

We've labeled for-profit education stocks as an investment battleground for some time now. Hedge funds have taken sizable positions on both the long and short sides of the trade. However, as the year began, more and more hedgies have shifted to the 'sell' or 'short' side of the seesaw. At last year's Ira Sohn event, Stephen Mandel of Lone Pine Capital gave a bullish presentation on Strayer Education (STRA). Immediately following him, noted short seller Jim Chanos presented a bearish look at the for-profit education industry. Fast forward to more recent times and we saw that Mandel is still bullish on education plays. However, when we looked at Lone Pine's portfolio, we did note that they've scaled back their position some.

We shift next to a look at one of Mandel's progeny, David Stemerman. He previously worked at Lone Pine and then left to launch his own hedge fund, Conatus Capital. Stemerman's fund had been long education stocks but by the fourth quarter of 2009 and first quarter of 2010, they had sold out of these stocks, citing increased uncertainty and increased government scrutiny. Additionally, Andreas Halvorsen's hedge fund Viking Global was a big investor in Apollo Group (APOL) as it had previously been one of their most sizable positions. Yet, recently we saw they sold out of APOL, adding to the hedge fund exodus.

Back on the bullish side of the fence, we did however see Roberto Mignone's hedge fund Bridger Management buy shares of Princeton Review (REVU), a test preparation service. The interesting thing to pay attention to here is the difference between full-on schools and test preparation services. While Eisman mainly targets programs distributing degrees, he was also bearish on Washington Post for their test preparation business.

So while a divergence of opinion is clear, we've also highlighted how some prominent players have wavered in their conviction. The moral of the story here is that hedge fund land is very decisively divided on this topic. This sector should be watched closely as it should be filled with opportunity. While the bulk of that opportunity has historically been found on the long side, it's clear that many have grown skeptical. We've already presented the bearish case for the industry via Eisman's presentation. Embedded below is the response from Harris Miller, President & CEO of Career College Association which obviously presents the positive case for the industry:



You can download a .pdf copy here.

So, the war of words has ensued and this sector will continue to be hotly debated. In the end, it seems that government regulation and intervention will likely play a large part in the final outcome, whatever it may be. You can check out Steve Eisman's original presentation where he laid out his short thesis: Subprime Goes to College. Additionally, head to the summary of the Ira Sohn Investment Conference for the rest of ideas hedge fund managers pitched.

Steve Eisman & FrontPoint Partners Ira Sohn Presentation: Subprime Goes to College

Earlier we aggregated a compilation of notes from the Ira Sohn Investment Conference where some very prominent hedge fund managers detailed investment ideas. One of those managers was Steven Eisman of FrontPoint Partners (Morgan Stanley). You may be familiar with him as he was profiled as one of the successful subprime traders in Michael Lewis' book, The Big Short.

Eisman thinks he has identified the next 'subprime' so to speak and gave a presentation at the Ira Sohn Conference entitled, "Subprime Goes to College." This speech provided a negative thesis on the for-profit education plays. In particular, Eisman is bearish on Apollo Group (APOL), ITT Educational (ESI), Corinthian Colleges (COCO), and Education Management (EDMC). Lastly, he also dislikes Washington Post (WPO) due to their ownership of the Kaplan test preparation business. His general thesis focuses on two factors: Washington clamping down on the industry and a rise in employment (generating a decline in enrollment). He notes that a key to the problem here is the 'rating' these institutions receive from accreditation boards and he likens these boards to the ratings agencies who blessed subprime mortgages.

Embedded below is the Ira Sohn presentation from Steven Eisman & FrontPoint Partners entitled, 'Subprime Goes to College':



You can download a .pdf copy here.

As we've detailed numerous times, the for-profit education space is an investor battleground with a clear divergence of opinion. Stephen Mandel's hedge fund Lone Pine Capital has been bullish on education plays. In fact, at least year's Ira Sohn event, he gave a bullish presentation on Strayer Education (STRA). While he has since scaled back his position some, we saw he still owned it when we detailed Lone Pine's portfolio. We also recently saw Roberto Mignone's hedge fund Bridger Management buy shares of Princeton Review (REVU), another test preparation service.

That said, we've also noted that some of these managers have had a recent change of heart. David Stemerman's hedge fund Conatus Capital had been long and sold out of their education plays. Andreas Halvorsen's Viking Global also exited Apollo Group recently. Additionally, there are also numerous high profile detractors such as Jim Chanos who gave a negative presentation on for-profit education at last year's conference. And now, Eisman has joined the mix with his negative view too. We'll watch with great interest to see how this one plays out. For more great ideas from hedge fund managers, head to our aggregation of notes from the Ira Sohn Investment Conference and be sure to also check out our hedge fund portfolio tracking series.