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Tickers in this Article: APOL, COCO, ESI, DV, CECO, STRA
Want to know which industry's stocks posted the biggest gains over the last twelve months? Education. The S&P 1500 Education Services Index is up 8.5% since the end of April 2008.

Care to know which industry's stocks posted the biggest loss over the last two months? Again, education. The S&P 1500 Education Services Index is down 12.3% since the end February.

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There are a couple of ways of describing the drastic about-face, but in the simplest terms, the party's over for these stocks – it's time to get out while there's still something left of them.

The Technical Term
Technically speaking, the phenomenon we're seeing with school stocks like DeVry Inc. (NYSE:DV) and Career Education Corp. (Nasdaq:CECO) is most likely to be sector rotation, or the market's tendency to move into stocks that are apt to lead, and move out of stocks likely to lag. That would certainly explain how these stocks did so amazingly well between March, 2008 and January, 2009.

It was in October, 2007 that unemployment took a clear turn for the worse. However, in March, 2008, the forcible sale of Bear Stearns to JP Morgan Chase (NYSE:JPM) made it clear things were getting more than just a little challenging. Unemployment moved above 5% the same month for the first time since November, 2005, when it was on its way down. Unemployment wasn't just rising then - it was starting to accelerate. (Take a look at the biggest economic declines in the U.S. since the Great Depression, see A Review Of Past Recessions.)

With more and more people out of work and underqualified, schools were seeing enrollment surge. For instance, ITT Educational Services (NYSE:ESI) saw a 15% increase in enrollment between October, 2007-October, 2008, translating into a 31% increase in yoy earnings by Q3 of 2008. For the quarter ending on February 28, Apollo Group (Nasdaq:APOL) saw a 23% increase in enrollment, compared to the same quarter a year earlier.

It didn't take long for school stocks to follow that lead either. By March, 2008, Apollo shares had started what would ultimately be a 166% run from trough to January's peak; Corinthian Colleges (Nasdaq:COCO) shares were the big winner for the period, making a 224% move over the same time frame.

But what happens when the for-profit schools' performances can't keep pace with their stock's gains? Even worse, what happens when the economy starts to grow those proverbial "green shoots" that could pull students out of the classroom and put them back to work?

You get rotation out of for-profit school stocks, that's what.

If That Weren't Enough
While we're sticking to rotation theory as the reason for the recent demise of education stocks, it's worth at least reviewing one of the plausible explanations other investors are citing. (For more, see Sector Rotation: The Essentials.)

In a nutshell, bad debt may be a significant chink in the armor. In early April, Apollo confessed that bad debt expenses had increased during the first two quarters of their fiscal 2009, from $59 million for the same six month period a year ago to $70.9 million.

Some investors are assuming ITT Educational Services will experience the same bad debt problem going forward. In fact, ITT has already confirmed it's battling rising bad debt, according to numbers filed a quarter ago. Bad debt expenses rose 3.2% then, to a total of 5% of revenue.

If it was just Apollo or just ITT, it would be easy to overlook. To see them both hit the same headwind at the same time is more than just a coincidence.
The other players, like Strayer Education Inc. (Nasdaq:STRA) and DeVry, are also going to let us know about their own bad debt woes pretty soon.

So is bad debt the problem and reason for the rotation, or is it a symptom of a bigger underlying problem for education stocks (like an economic recovery)?

The rotation is a symptom, though it's worth entertaining the "it's a little of both" notion. Regardless, these stocks are headed south for one reason or another, and either reason isn't likely to be undone anytime soon. It's time to unenroll yourself.

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