EDMC: On the Move

When you follow stocks in a narrow, or at least a somewhat limited space, you tend to see the same symbols popping up over and over again as you watch big daily movers and those stocks that trade with pretty heavy volume.   Over the past year there have been a dozen stocks or so that seem to have occasionally hit the big daily losers list.  The cynic in me chuckles and shakes his head each time these same stocks pop up.  Nonetheless, I try to convert these symbols to memory even if I do not catalogue them.  Believe it or not, there can be an advantage to following these stocks as a lot of money can be made by big annual losers, especially if they can execute some semblance of a turnaround.

This notion is extremely important to recognize during this time of year. As we near year end, and the bulk of investor tax loss selling is completed, the big losers of the year tend to be oversold. Moreover, they often become some of the biggest gainers during the last week of the year and the first week of January.  Investors always think about how well small cap and penny stocks tend to perform in the month of January, which is largely true, due to the second phase of the January Effect.

For example, since 1991, the S&P 500 Index has risen by an average of nearly 7% in January alone, and when the prior December performance is added to the return it nears 10%.  Of course small stocks tend to perform even better. However, the group that typically generates the greatest return is the previous year’s biggest losers.

Given this unusual phenomenon we thought it would make sense to identify some of 2012’s biggest penny stock losers in anticipation of what could be a serious accumulation period beginning at year-end.

Why not start with something in the education space? Education Management Corporation (NASDAQ – EDMC - $3.98) is down roughly 83% from its 52-week high and actually looks like it is gearing up for a move higher.  It set a new high for the past 3 months just yesterday. Frankly, the stock is really cheap too, from the valuation perspective.

With approximately 132,000 students, EDMC is among the largest providers of post-secondary education in North America, based on student enrollment and revenue, with a total of 110 locations in 32 U.S. states and Canada.  The Company offers academic programs through campus-based and online instruction, or through a combination of both.   EDMC’s educational institutions include The Art Institutes, Argosy University, Brown Mackie Colleges, and South University.  Students can earn undergraduate and graduate degrees and certain specialized non-degree diplomas in a broad range of disciplines, including media arts, health sciences, design, psychology and behavioral sciences, culinary, business, fashion, legal, education and information technology.

The stock is down substantially due to missing forecasts and restructuring due to changes in the industry. Nonetheless, EDMC released its 1Q13 results in October and provided annual guidance for the 2013 fiscal year.  The Street is now forecasting EPS (excluding charges) of $0.41 versus $1.15 in fiscal 2012, with revenue exceeding $2.4 billion.

If these expectations hold true, EDMC is trading 10x FY13 EPS and 8x FY14 EPS estimates of $0.49, which is very low, even for a company in the midst of a turnaround.  Moreover, the stock is now trading .7x revenue.  We could see the stock easily trading to $5.00 by early next year, even if tax-loss selling continues, which is still only 14x FY13 EPS.

EDMC appears to have bounced nicely and based well since reaching its $2.84 per share low 3 months ago. In our view, much of the downside is already in the stock and even a small amount of accumulation could take it much higher.

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