Jeff Ubben is betting on underperformance in for-profit training shares
Activist Jeff Ubben believes the market is wrongly underestimating strategic education because it is a for-profit education company.
His company Inclusive Capital has a stake of more than 5% in Strategic Education. Since early June, the stock has fallen more than 40% while the S&P 500 is up more than 12%.
For-profit education companies have gained a bad rap over the past several years, but Ubben believes that strategic education can generate high returns by leveraging its technological capabilities. In addition, the company has taken initiatives to reduce the cost of post-secondary education.
Company: Strategic Education Inc. (STRA)
Companies: Strategic Education is a not-for-profit education services company that provides post-secondary education and other academic programs through its subsidiaries, Strayer University, New York Code and Design Academy (NYCDA), and Capella Education Company. As of December 31, 2019, the university offered 53 degrees with 128 specializations for graduate and undergraduate students in business, accounting, information technology, education, nursing, public administration, and criminal justice in regions of the United States in 77 locations in the Mid Atlantic and South and online. The university also offers an Executive Master of Business Administration online through the Jack Welch Management Institute. NYCDA offers undergraduate courses in web and application software development, primarily on campus in New York City. Capella offers programs for post-secondary education and professional qualifications.
Market value: $ 2.3 billion ($ 94.78 per share)
Activist: Inclusive Capital
Percentage ownership: 5.65%
Average cost: $ 114.88
Activist Comment: Inclusive Capital Partners was founded in 2020 by ValueAct founder Jeff Ubben to promote capitalism and governance for a healthy planet and the health of its people. The company strives for long-term shareholder value through an active partnership with companies whose core business contributes solutions to this pursuit. Inclusive is a return-oriented fund with a focus on environmental and social investments. Her main focus is on the ecological and social added value that leads to the added value of the shareholders. Inclusive is a $ 1.5 billion fund with 10 to 12 companies in its portfolio. It is the successor to the ValueAct Spring Fund, which was launched in January 2018 and merged into Inclusive in 2020. Inclusive is building a huge network and counting on experts from industries such as energy, electrification, water, agriculture, food production, particles, education and human rights. Just like ValueAct’s constructive, patient investment style, Inclusive will seek to win the trust of managers, board members and institutional investors. Ubben acts as portfolio manager and Eva Zlotnicka as vice president. Zlotnicka already has a relationship with ValueAct through her interactions with Morgan Stanley, where she served as Vice President and US Head of the Global Sustainability Research Team. At Morgan Stanley, she worked to address and raise awareness about environmental and social issues inside and outside companies.
Inclusive reported a 5.65% position in Strategic Education for investment purposes.
Behind the Dcenes
Inclusive (through its predecessor ValueAct Spring Fund) first announced his position with the company on April 27, 2018 when Ubben expressed his belief that the company would thrive because of its technological capabilities. The ValueAct Spring fund has now been merged into Inclusive, but many of the core principles that Ubben developed at ValueAct are central to Inclusive; B. Using activism for change and investing in companies that are misunderstood or misunderstood by investors.
Strategic Education is a for-profit educational services company that conducts its business primarily through its wholly-owned subsidiaries Strayer University and Capella University. Nonprofit schools have historically had a bad reputation for billing a lot of money and making students run up a ton of debt that was freely spent by the government in order to get either a bad graduation or no graduation. The Obama administration cracked down on for-profit schools by putting in place a set of rules and regulations to hold these institutions accountable and bring much of the industry out of business. Now that a new democratic government comes into office, these types of stocks are hit again. Since June 8, the stock has fallen nearly 49%, compared to a 12% gain for the S&P 500 over the same period.
This is where misperception comes into play. Strategic Education is an accredited post-secondary school that uses technology and artificial intelligence to improve the student experience and the value of education while reducing the cost of tuition from $ 15,000 per semester to $ 8,000 per semester. In addition, they implement several positive initiatives that benefit both society and the company’s bottom line. The main project they announced in September is WorkforceEdge, a joint venture between the company and Noodle Partners, an online program management company for nonprofit schools like the University of Michigan and the University of Tennessee.
Inclusive is a private investor in Noodle and has been a leader in funding the company’s Series C and clearly instrumental in running this joint venture. WorkforceEdge is a program for companies to develop an optimized, efficient and free online platform with which their employees in online schools can be reimbursed tuition fees. The Noodle relationship enables Strategic to offer corporate customers options both on and off the network, just like in healthcare. In-network options (i.e. Strayer and Capella) are often fully reimbursed by the host companies, and out-of-network options (i.e. Michigan, Tennessee, and other schools on the Noodle network) are generally subsidized by the host companies. In addition, Strategic was able to further reduce the tuition fees for corporate clients at Strayer or Capella to USD 6,000 per semester.
Another, even smaller, initiative that Strategic implemented is Sophia, an affordable way for students to get college credits that cut the time it takes to enroll in an online college. These initiatives primarily benefit society on many levels. They significantly reduce student debt, enable students to get a faster, cheaper, more valuable degree, and help companies retain their employees. For Strategic and its shareholders, it provides a streamlined and efficient source of student acquisition that the company never really had. Accordingly, Strategic is hoping to triple its B2B students from 20% to 60% over the next five years, and to cut its per-student loans from $ 8,100 to a loan-free company that is paid primarily by the students’ employers.
To ensure management is focused on the right factors for sustainability to increase shareholder value, the company’s senior management team bonuses will depend in part on metrics related to reducing the number of credits per student. While this could really hurt earnings in the short term, it could be very profitable for the company in the long run. It could change the company from a company with perceived regulatory risk to a company with no regulatory risk and a company with no sales team that relies on Google to attract students through HR departments from companies to a company with a corporate sales system. When this is achieved, there is a great opportunity for shareholder value creation. Currently, the company is trading on roughly 6x EBITDA while companies like Workday are trading on over 12x in revenue.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.