the real march madness: our terrible system of higher education

[note: a slightly different version of this post originally appeared on my Yahoo! Finance contributor page]

I’m a sports fan, but I don’t plan on watching the Final Four this weekend. Sure, the players are inspiring and the games are usually exciting and dramatic. I just can’t bring myself to tune in to a bunch of unpaid employees generating billions for one of the most corrupt rackets in the world, the NCAA. But–as regular readers of this blog know all too well by now–my distaste for so-called amateur athletics pales next to the utter disgust I feel for our broader system of higher education.

Talk about an industry desperately in need of disruption.

Imagine a business that has raised its prices four times the rate of inflation while delivering poorer services to its customers. How long do you think a company behaving like that would survive? How about if that same business spent huge amounts of money on projects and activities (like athletics) that did nothing to improve its core product and then hired all sorts of nonessential administrators, many of them commanding six and seven figure salaries? Normally, that company’s margins would shrink, its stock price would plummet, and its shareholders would mutiny.

Of course, our business of higher education doesn’t play by normal rules. It enjoys a virtually limitless supply of de facto government subsidies, the costs of which get transferred to its customers. The average student now comes out of college 30 grand in the red. That’s a hell of a graduation present. Is it really any wonder that our economy isn’t growing when we’ve crushed an entire generation with a trillion-dollar debt load?

Fixing the problem is not going to be easy. I don’t have much faith in the for-profit model, because the vast majority of those schools suffer from the same problem as their nonprofit counterparts: they cost too damn much. But something interesting—and very unique—is happening at one company in the sector.

Allow me to offer another thought experiment. Imagine a business that doubled its earnings-per-share in four years and beat analysts’ expectations 17 quarters in a row. Now imagine that same business was likely to double its earnings again in the next few years as it expands its operations to keep pace with an insatiable demand for its products. You’d expect that company’s stock to soar, wouldn’t you? And yet, it’s down about 9 percent in the last year.

I’m talking about Grand Canyon University (ticker: LOPE) in Arizona. I’ve written about this innovative company before. I’ve owned its stock for several years now, and I am mystified by its recent lackluster performance. I understand that investors rightly see most of its for-profit peers as dubious diploma mills, but Grand Canyon doesn’t consider those companies its main competition. By keeping costs low (tuition is about the same as a state school) and smartly mixing online and brick-and-mortar education, it’s targeting the customer base of traditional nonprofit institutions. That strategy is obviously working. The company is planning to double the size of its flagship campus and grow its ground enrollment from 15000 this coming fall to 25000 students in a few years.

I’ve never seen such a thriving, fast-growing business weighed down so heavily by the negative perception of its sector, and I can’t imagine LOPE’s slump will persist much longer. Warren Buffett famously said the stock market is a short term popularity contest and a long term weighing machine. After awhile, even the coolest, most popular stocks in school have to start showing results. Tesla’s recent struggles are a good example of this phenomenon, which also works in reverse. Even the most maligned stocks can only sink for so long if their profits keep getting fatter. Call me crazy but if you give me the choice between two companies attempting to disrupt their industries, I’ll invest in the cheap and wildly profitable one over the trendy and expensive one every time.

Oh yeah, Grand Canyon also fields a Division I basketball squad. The college’s management views the team as a low cost marketing opportunity. I doubt they’ll make the Final Four anytime soon, but it’s not like I’d be watching anyway.

Addendum: A commenter on my Yahoo! page brought up the possibility of Grand Canyon converting to a nonprofit institution. While it still might happen, it’s far from a done deal. Management has been saying publicly that it’s less than 50-50 at this point; as shareholders are reportedly not excited about a buyout at a 15 percent premium to the present stock price. The fact that investors are (again, reportedly) balking at that kind of guaranteed profit means they, too, think LOPE’s growth is just beginning.


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