The Strange Case of Strategic Education, Inc.
We’ve often used this blog to highlight the critical importance of being able to disassociate business performance from investment performance and using emotional intelligence to cut through the meaningless noise that pollutes our psyche. To do otherwise is a sure path to disappointment, and worse, severe investment underperformance. We’ve pointed out several cases where a company’s stock price seemingly becomes unhinged from the business’s actual performance — both to the upside and to the downside — to the detriment of investors. Now, in its latest manifestation, we have the strange case of Strategic Education (NASDAQ: STRA).
In a recent post, I mentioned STRA having to do with the impact of elections on investment portfolios, pointing out that it’s the only “Red” company we own among the primarily politically agnostic companies in our portfolio. The reason being that for-profit education companies can be expected to thrive under Republican education policies while suffering under the headwinds of Democrat policies that generally oppose for-profit education colleges.
That’s not just speculation. President Obama actually pursued regulations that linked the ability of for-profit colleges to get federal money to their ability to prove that their graduates could get jobs. He also cut the funding and downgraded the accrediting body’s legal status for for-profit colleges, essentially spelling their doom, with many of them filing for bankruptcy.
How STRA Grew Stronger in the Face of Adversity
President Trump reversed those policies, and for-profit colleges began to thrive again. The Trump years were especially good for STRA, which was well-positioned due to its strong cash balance sheet and savvy management. The management of STRA understood that the company’s fortunes could change quickly if the political winds changed. So, it took some defensive measures to reduce political risk. First, the company, which was operating under the name of Strayer Education, merged with Capella, another well-managed for-profit college.
The merger in August 2018 resulted in a doubling of revenues for the newly formed Strategic Education, Inc., and its stock price more than doubled over the next year and a half. The company’s investment performance was closely matching its business performance, which was to be expected.
The company’s second strategic move was to diversify its operations beyond the reach of a potential Biden Department of Education. In July 2020, STRA paid all cash for a big chunk of the schools and education programs from Laureate Education Inc, instantly expanding its reach to Australia, New Zealand, and parts of southeast Asia. On paper, it was a brilliant move because, while the company could still expect to suffer from a change of policies, its international exposure would offset the negative implications of a Biden Presidency.
What it Looks Like When a Stock Becomes Unhinged From Business Performance
Along with every other stock, STRA was caught up in the February-March stock market crash contagion. And, like most well-managed companies with solid business performance, its stock fully recovered and climbed to a new 52-week high in June, topping out at 183. But then, with the prospect of a Joe Biden presidency looming larger, the bottom fell out. STRA hit a low of 83 on election day, despite reporting twelve-month earnings growth of 43.5%, which was well ahead of 80% of other U.S. stocks. Yet, while STRA is down off more than 50% from its high, the S&P 500 is up 50% during the same period.
The only explanation of why the market is punishing STRA despite its business outperformance is the uncertainty surrounding the for-profit education sector. But, from our perspective, having identified STRA a few years back as a remarkably well-managed company with no debt, the fundamentals have not changed. STRA has been facing these political headwinds for more than a decade and has managed to get stronger in its response to them.
STRA doubled its revenues with its acquisition of Capella. With its purchase of world-class educational properties from Laureate, it inoculated a significant part of its revenues against a Biden presidency. Its year-over-year revenues are up 43% this year. If anything, STRA is stronger now than it was when its stock was selling at $184. Its fundamentals and business performance have improved.
Keep Your Eye on the Ball (Fundamentals)
So, what we are witnessing is STRA’s stock price becoming completely unhinged from its business performance to the extent that it is now underperforming the market. Indeed, things could get choppy for STRA under a Biden administration. But, investors seem to be forgetting that STRA has been through this before and emerged a stronger company. Anticipating the return of unfriendly policies, its management has fortified the company by widening its moat. Investors who are able to disassociate the business performance from the investment performance will seize the opportunity.