Still True Today, Originally Published August 15th 2010. Two Years Ago!
This morning we went scanning for 52 week low stocks and all the higher education companies popped up on the list. Devry announced earnings on Thursday night that beat expectations but that didn’t help matter. The market is responding to the ongoing investigation in the senate regarding deceptive practices conducted by various for profit colleges.
As we always like to remind people, you can not fight the trend. The trend on all these stocks are down. They all made 52 week lows on Friday, and we can only assume that they will continue making new 52 week lows until something changes. The change will happen when the Senate and Department of Education finish their investigation and implement the new rules that they believe will stop the fraud or deceptive practices.
Many traders and investors are talking about how low the valuations have gone on these stocks. Apollo Group now have a future P/E ratio of 7. Devry has a forward P/E of 8. These are companies that have had earnings growth of 22% – 75% in the past 5 years, and future earnings growth of 4% – 22%.
Why are the stocks selling off? It is not just overblown fear, it is fear that the new laws will effect enrollments and profit margins. What happens if the Department of Education or Senate decides they will put a temporary ban on student loans to these colleges until they figure out what is going on? Then we will see these stocks drop another 50%. Take a look at the Home Healthcare Sector. I recently wrote an article to subscribers of OptionsWeekly.com’s Newsletter about Amedisys versus OpenTable. In the Home Healthcare Industry the Senate is also looking into questionable billing practices. They are thinking of changing eligibility and reimbursement rates. The stocks have responded by dropping.
How do we trade this?
When we are in a situation as we stand today, where there is a huge unknown hanging over a company, and this unknown will have a major impact on revenue, the best bet is to stay away. Do not try to catch a falling knife. When they are cleared of all wrong doings and they are back in business as before, the stocks will move higher. How high will they go? They will move up 10% – 15% the day the news is announced and that will be your buy signal.
It is better to buy a stock that dropped from $100 to $50 a share for $57.50, then to buy the same stock at $50 and have it drop another 50%.
What to do if you already own the stock? There are two choices. Either you can sell the stock, take your loses and wait for a new entry point when the stock starts moving back up . Or you can sell calls against the stock that you own and look to recoup your losses that way.