Despite a slowly recovering economy and the push into stocks that current low interest rates continue to provide, today's market is fraught with dangers. Stock prices are not as attractive as they were a year ago. Valuations have clearly increased at a faster rate than the growth in earnings of many businesses. While there are few places today where bargains existed, many more pitfalls lie ahead.

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The Business of Education
It's considered conventional wisdom that when the economy is bad and jobs are scarce, folks go back to school to gain more skills in hopes of finding work. That premise is certainly true and the data seems to support it. Over the past decade, which began with the bursting of the internet bubble and then the housing and financial crisis, enrollment rates at the major online education providers have soared.

The biggest publicly traded provider of education is Apollo (Nasdaq:APOL). In the most recent quarter, enrollment alone grew by over 15% to over 450,000 students in its University of Phoenix degree programs. That's a strong growth rate for any business. During this recent recession, other major players in the education space, such as Career Education (Nasdaq:CECO), ITT Education Services (NYSE:ESI) and Corinthian Colleges (Nasdaq:COCO), experienced the same results as more people seek new skills as a way to increase employment opportunities. (For more, check out Keeping Up With Your Continuing Education.)

Not an Easy Test
Yet the recipe for education stocks is not that cut and dry. Just like traditional universities, a majority of students rely on external sources of financing to meet educational expenses. As the largest for-profit university in the U.S., Apollo's University of Phoenix is experiencing an increase in bad-debt expense as the company deals with more and more collections from students who received financial assistance. Of course, the irony with increased enrollment is that it increases the likelihood that bad-debt expenses will continue to increase.

Failing Grades?
The education sector has been on a steady decline over the past few months. Despite valuation numbers that look attractive, the future looks as cloudy as it's been for these education companies. In addition to the serious threat of continued bad-debt expenses arising from students facing difficulty in funding education, government policy may be another major stumble. According to the "gainful employment" measure being floated around in Congress, college graduates must be able to earn enough in order to adequately pay student loans or the school will lose access to federal funding channels.

Don't Mess with Uncle Sam
When you consider the vital role that federal funding plays in education, any new policy that affects that role could have disastrous results. Just the mere discussions of it has sent shares of education stocks down by 15% to 30% over the past couple of months. And after two years of strong enrollment, many analysts are looking for that to slow down as well. For these reasons, educations stocks do not pass the test today.

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Tickers in this Article: APOL, COCO, CECO, ESI

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