Online education understandably gets a bad rap, making most people thinking of high pressure enrollment tactics, diploma bills and government intervention. You can’t really blame people for thinking that way: University of Phoenix, the largest player in online education, has been the subject of multiple investigations and Corinthian Colleges was driven out of business over fraud allegations.

But not all online education companies are the same.

2U (NSDQ: TWOU), while technically in the online education business follows a very different business model. Instead of being a standalone college itself, it partners with other colleges to develop their online programs, and we’re not talking about fly-by-night colleges that no one’s ever heard of. Its partners include Yale, Georgetown and UNC-Chapel Hill to just name a few. So 2U doesn’t have students of its own, it just provides a platform and support to its partner’s students.

That model protects it from the reputational concerns that has dogged the online education industry, plus it removes a lot of legal liability. Getting the investing public to make that distinction has been a tough sell though, especially since 2U collects a little more than have to the tuition paid by students using its platforms. That trend finally seems to be shifting.

While the stock is down a little more than 5% since we added it to our portfolio back in November, it made a big move last week on virtually no news from the company. Between Jan. 9 and 13 the shares jumped 8.3%, rising 2.5% on Friday alone. So what drove that gain?

For one thing, the company issued better than expected fourth quarter revenue guidance the week before. While it predicts earnings to fall between $0.02-$0.03, in line with analyst expectations, it predicted revenue to come in between $56.0 million and $56.4 million. Given the fact that 2U has had eleven straight beat and raises, beating expectations then raising its guidance, that seems to be attracting attention.

Institutional investors in particular have been buying up 2U stock. While they’re holdings are reported on a lagging basis, last week Peregrine Capital Management reported in an SEC filing that it acquired 779,022 shares of the company in the third quarter. According to 13F filings, several mutual funds which use fundamental investment strategies have also been added to their stakes as well as some index funds. That’s a great indication that the “smart money” sees a lot of upside potential in the stock.

There’s still a lot of room between 2U’s current share price and our buy limit, but between its track record of raising expectations and the positive sign of growing institutional interest, we think that gap will start closing soon.

Buy 2U up to $45.

– Benjamin Shepherd 

AMAG Pharmaceuticals Hits Air Pocket

I am downgrading AMAG Pharmaceuticals (NSDQ: AMAG) to HOLD and recommending a sell stop at $22.

Earnings season is the time of the year for air pockets – those sudden drops in the price of a stock that seem to come out of nowhere.  And our recent pick, AMAG Pharmaceuticals, has just delivered one.  Personally, I’m scratching my head.   Here is a company that pre-announces earnings within its previous guidance, and reports that the future remains fairly robust. It  projected a 20% growth rate for 2017 with over $500 million on its balance sheet, and yet the stock gets hammered.

Let’s recap and play detective for a minute.  On Jan. 9, the stock fell over 30% as the company pre-announced unaudited results of “record growth” including revenues of “between $149 and $154 million” for its most recent quarter, just below analyst expectations of $155.7 million. Analysts from Raymond James and Zack’s downgraded the stock based on the expectations that the company’s growth will start to flounder as its franchise drug, Makena, which reduces premature births in women with previous history of the event, will lose its patent protection in 2018.

But here is the big head scratcher. AMAG did not include any quantifiable quarterly earnings numbers in its press release, while only providing a wide range of possibilities for the full year. They also did not mention Makena other than its current sales while reiterating its expectation that a new self-injection delivery system for the drug, which is still not FDA approved but seems promising, will continue the company’s sales growth pattern. 

The company’s other two revenue generators, Feraheme (a treatment for iron deficiency anemia) and MuGard (for mouth sores) have a mixed future with the former expecting to go off patent and face generic competition in 2010.  AMAG is trying to expand the label of indications for Feraheme, but FDA approval for any drug is always uncertain.   That leaves the CBR (cord blood registry) business, where umbilical cord blood is stored for potential future stem cell harvesting, and a potential candidate for female sexual dysfunction treatment as possible revenue streams.  So why release incomplete information a month ahead of the formal earnings release. What is ahead? A pleasant surprise or worse news?  

The answer may lie with the earnings that were not fully disclosed in the preliminary announcement and with the upcoming full earnings report in February. It is plausible that there may be some further clarification of information before or after the earnings report.  It is also possible that management was testing the waters to see what the market would do in response to what it might see as tepid numbers.  It could also be that the actual numbers – when they are released – will be better than expected and the stock will rebound.  

On a technical basis, the stock seems to have found a temporary bottom and may bounce as high as $25 in the short term.  It makes sense to use the bounce to lighten positions, but I am not recommending a complete exiting of the position at this point.  Since $22 seems to be the floor, I am now recommending a hard sell stop there. 

I own shares in AMAG.

 – Joe Duarte