By Linda McDonough

When does a 3% decline in revenue and a 13% decline in profits inspire a 30% increase in a company’s stock price?  Welcome to the perverse world of low expectations.  Strayer Education (Nasdaq: STRA) whiplashed short sellers and skeptics by issuing better than expected earnings and a positive outlook for summer enrollment.

On July 29th, Strayer, which once hit a high of $240 in 2010, jumped more than $11.50 in a single day to $53.34 thanks to a slight positive trend in its second quarter earnings.  The provider of for-profit post secondary education hosts students on 80 physical campuses and via online classes.

Revenue has declined more than 10% each year since 2011 and earnings have shriveled to a fraction of the level enjoyed in Strayer’s heyday in 2010. Overzealous recruitment at the industry’s peak ushered in a pool of under qualified students who sent student loan default rates through the roof.

Increased scrutiny from regulators regarding academic standards and recruitment policies have decimated enrollment numbers for almost every player in the industry.  Despite its stock being down 40% year to date, Strayer has actually been one of the better performers in the group.  Corinthian College, a fellow for-profit educator, closed its doors in April and filed for bankruptcy shortly thereafter.  

After the demise of Corinthian and a near-death experience for ITT Education (NYSE: ESI) in May, short interest piled up in almost every stock in the sector.  We’d attribute a large part of the jump in Strayer’s stock to buyers covering their short positions.

While Strayer’s earnings of $1.11 were higher than estimates of $1.00, they were still down greatly from the previous year.  2015 estimates of $3.59 reflect a 17% drop in earnings.  With the stock trading at 15 times earnings, investors may want to wait until Strayer produces consistent growth before enrolling in this stock.