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For Profit Education Stocks, Cheap Or Toxic?

Monday, 27 Sep 2010 | 5:48 PM ET

Does for-profit education payoff? That’s the question Senators will ask Thursday as they hold hearings investigating whether graduates from the likes of Apollo Group's University of Phoenix, Strayer, and DeVry end up in lucrative careers or buried in debt.

Wall Street wants to know too.

For-profit education stocks have tanked on fears that looming regulations will cut off the $30-plus billion in federal funds that fuel the $118 billion industry.

Analyst Brandon Dobell of William Blair can’t remember a time when these stocks were under greater scrutiny.

”(This is) the highest amount of uncertainty that we have seen in the past ten years and it's obviously reflected in what the stocks have done in the past six or nine months,” he says.

Year to date DeVry and Apollo Group are both down by about 20%. However, Blair remains cautiously optimistic.

”Profitability at many of the institutions is still very high,” he adds.

But not everyone has a positive outlook – particularly not Steve Eisman of Frontpoint Partners. He thinks developments in the for-profit arena are similar to what happened in subprime mortgages a few years back.

"The (only) difference between this and subprime is that in subprime the loans were going to go bad no matter what the government did, here the scheme is going to go on until the government stops it."

And that leads to the billion dollar question. Should you bet these stocks get a failing grade? Or are they poised to go to the head of the class?

Options Action
Is there any hope in the sector or is it really the next subprime? Mike Khouw, Cantor Fitzgerald, shares some options plays in the sector.

”At some point here we are going to get some clarity on that,” adds Blair but, until we do, we are going to see a lot of volatility in these names as investors on both sides of the coin try to figure out what the end game is going to be.”

"If you want to play the space for the beta there’s huge short interest in most of these names," says Guy Adami. That's something to keep in mind.

"There are very smart people on both sides of this trade," adds Brian Kelly. "I’d just stay away."


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Trader disclosure: On Sept. 27th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Terranova Owns (APA), (AAPL), (ARUN), (BMO), (C), (IBM), (HES), (JOYG), (XBI), (FTO), (OXY), (ORCL), (PEP), (POT), (RSH), (SU), (RIG), (UPL), (VRTS); Weiss owns (BAC), (MOS), (CSX), (HK), (TXN), (WFR), (QCOM); Weiss is short (SF); Pete Najarian owns (NETL) call spreads; Pete Najarian owns (POT) call spreads; Pete Najarian owns (CNI); Pete Najarian owns (AMZN) call spreads; Pete Najarian owns (AKAM) call spreads; Pete Najarian owns (RAX) call spreads; Pete Najarian owns (LLNW) call spreads; Pete Najarian owns (DD); Pete Najarian owns (NOV); Pete Najarian owns (YHOO); Karabell owns (POT), (RIMM), (AAPL); Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST)

For Anthony Scaramucci
Scaramucci and Skybridge Capital own (AAPL)
Scaramucci and Skybridge Capital own (C)
Scaramucci and Skybridge Capital own (JPM)
Scaramucci and Skybridge Capital own (PG)
Scaramucci and Skybridge Capital own (WMT)

For Brian Kelly
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (ATI)
Accounts managed by Kanundrum Capital own (TIE)
Accounts managed by Kanundrum Capital own (PCL)
Accounts managed by Kanundrum Capital own (LPX)
Accounts managed by Kanundrum Capital own (RAX)
Accounts managed by Kanundrum Capital own (ANDE)
Accounts managed by Kanundrum Capital own (GPRE)
Accounts managed by Kanundrum Capital own (TIP)
Accounts managed by Kanundrum Capital are short (XLF)
Accounts managed by Kanundrum Capital are short (IAI)
Accounts managed by Kanundrum Capital are short (FDX)
Accounts managed by Kanundrum Capital are short (BCS)
Accounts managed by Kanundrum Capital are short (HYG)

For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DLUEY)
Virtus Investment Partners own more than 1% of (DRYS)

For Steve Grasso:
Stuart Frankel & Co and it’s partners own (AMGN)
Stuart Frankel & Co and it’s partners own (BAX)
Stuart Frankel & Co and it’s partners own (COG)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HPQ)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MERC)
Stuart Frankel & Co and it’s partners own (NWS.A)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (PDE)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (RDC)
Stuart Frankel & Co and it’s partners own (TLM)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners are short (QQQQ)

For Zach Karabell
Funds managed by River Twice Capital own (POT)


For Dennis Gartman
Funds managed by Gartman own Gold

For Richard Volpe
***No Disclosures***

For Doug Freedman
Freedman owns (HPQ)
Freedman owns (QCOM)
Freedman owns (AAPL)

For Mike Khouw
Cantor Fitzgerald makes a market in (COCO)

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