For profit education

As short favourite Corinthian Colleges begins what many are calling its final chapter, we review investor sentiment in education services firms.

• Average short interest in the sector has fallen significantly in the last 18 months
• Leading the short covering is Devry which has seen shorts sink to a levels seen last year
• But the industry still sees a flurry of shorting with K12 and Itt both seeing strong demand to borrow

After years on top of the most shorted list, Corinthian Colleges looks set to be writing its final chapter as it announces plans to close dozens of campuses and sell off 100 others. The wind down comes on the back of the threat of losing federal funding after the college failed to disclose its graduate employment track record. This latest revelation from the controversial company has seen its shares slump by over 85% year to date, while short sellers have continued to add to their positions in the lead up to the firm’s final chapter.

Aggregate short covering

Despite what is arguably the most severe turn of events to beset the industry since Steven Eisman called out the sector at the 2010 Ira Sohn Conference, short sellers seem to have lost their appetite in educational services firms with demand to borrow shares at its lowest level in over 18 months. Current average demand to borrow shares in educational services firms is 3% of shares on average, roughly half the level seen a year ago just ahead of the latest bout of short covering.

Leading the covering are the two largest industry players, Apollo Education and Devry Education, which have both seen shorts exit the vast majority of their positions after their revenues look to have stabilised after several years of limbo.

The fact that both these firms have managed to beat analyst expectations over the last three quarters running indicates the type of turnaround story we are currently seeing in the sector. This also suggests that the industry is adapting to the new normal after several years of contentious government struggles.

Still several short targets

Despite the recent short covering, we still see some companies seeing heavy demand to borrow in the space.

By far the most shorted company in the sector is Itt educational services which has 33% of its shares out on loan. Itt is facing similar issues to Corinthian Colleges after it failed to meet a deadline to file documents to the US Department of Education. This latest development, combined with the fact that the company has yet to settle accounting issues in its students loan program, has seen its shares more than halve this year to date.

The other two firms seeing significant short interest are Strayer and K12, but both see less demand to borrow than a year ago. However, K12 has seen short sellers redouble their attention after it failed to meet admissions targets last September.