Author: Dan Beckerman
Covestor Model: Flexible Value
Disclosure: Long APOL
Shares of portfolio holding Apollo Group (NASDAQ: APOL), the for profit education company, rallied recently as the Department of Education introduced more favorable than anticipated regulations in the final gainful employment rules. APOL is at about an 8% weight in our portfolio as of June 3, 2011. We believe there are several reasons to be bullish on Apollo at these levels. Let me explain why I believe much of the negativity that you may hear in the news media regarding this business is misleading.
Apollo has demonstrated extraordinary long term growth as the need for delivering education more effectively through online and industry specific solutions has grown exponentially. Their revenue has grown signficantly over the past decade. Apollo’s University of Phoenix has been a leader in providing a high quality education online. They were early relative to other for profit institutions in terms of getting in front of proposed DOE regulations in order to demonstrate regulatory compliance and best practices. We believe that in the same way that we have adapted technology to improve our lives in shopping, reading, networking, science, and advertising, technological innovation will continue to accelerate the pace of change in education and particularly in the for profit industry. The effect of these changes is accelerating and by providing the tools that people need to increase their skill set, we feel that APOL will be a key player going forward.
Apollo Group is quite a profitable business generating trailing twelve months’ Return on Equity of 24%. They have eliminated much of the costs involved in maintaining a traditional college, including campuses and stadiums. The company has a rock solid balance sheet with over $1 billion in cash and less than $200 million of debt. APOL generates almost $5 billion in annual revenues and the market cap is approximately $6.6 billion as of 6/3/11.
The for profit education companies face significant headline risk due to their aggressive growth and use of student loans. As investors we are independent thinkers and we think that the proactive stance taken by APOL on these issues have put them in a position to improve their offerings while reducing their exposure to these risks. We often find our best ideas at times when there is great uncertainty, volatility, and pessimism.
In our strategy we want to own great businesses at deep discounts. Because of our strict criteria and the heavy discounts to fair value that we require, there are not that many businesses that make our cut. As of June 3, 2011, we hold only fourteen businesses. Although there are fewer businesses today that meet our strict criteria than we may have found in early 2009, we think that we found some compelling businesses that should not be ignored. Our belief is that in the current environment the Bond market overall presents relatively poor risk reward characteristics, and that our best opportunity to add Alpha in the current environment will be through the individual equity market.
We concentrate our fund in our highest conviction ideas. Our goal is to generate superior risk-adjusted returns relative to the general investment market by investing in unusual opportunities that appear undervalued according to our criteria. Our picks are made by engaging in rigorous analysis of a range of fundamental factors.
We also have the flexibility to respond to unusual investment conditions. For example, we may buy closed end funds that are at substantial discounts to their NAV, and we may buy a bond ETF if yields are unusually high.
Sources:
APOL statistics from Yahoo Finance as of 6/3. https://finance.yahoo.com/q/ks?s=apol
