Jeff Ubben bets on underperforming for-profit training inventory
Activist Jeff Ubben thinks the market is mistakenly underappreciating Strategic Education because it is a for-profit education company.
His firm, Inclusive Capital, has a more than 5% stake in Strategic Education. Since early June, the stock is down more than 40%, while the S&P 500 has rallied more than 12%.
For-profit education companies have gotten a bad reputation in recent years, but Ubben thinks Strategic Education can provide strong returns by leveraging its technology capabilities. Additionally, the company has undertaken initiatives aimed at reducing the cost of post-secondary education.
Company: Strategic Education Inc. (STRA)
Business: Strategic Education is a 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 Dec. 31, 2019, the University offered 53 degree programs with 128 graduate and undergraduate specializations in business administration, accounting, information technology, education, nursing, public administration and criminal justice at 77 physical campuses located in the mid-Atlantic and southern regions of the United States, and online. The University also offers an executive Master of Business Administration online through its Jack Welch Management Institute. NYCDA provides non-degree courses in Web and application software development, primarily at its campus in New York City. Capella provides postsecondary education and job-skills programs.
Stock Market Value: $2.3B ($94.78 per share)
Activist: Inclusive Capital
Percentage Ownership: 5.65%
Average Cost: $114.88
Activist Commentary: Inclusive Capital Partners was formed in 2020 by ValueAct founder Jeff Ubben to leverage capitalism and governance in pursuit of a healthy planet and the health of its inhabitants. The firm seeks long-term shareholder value through active partnership with companies whose core businesses contribute solutions to this pursuit. Inclusive is a returns-driven fund with a focus on environmental and social investing. Their primary focus is on environmental and social value creation, which leads to shareholder value creation. Inclusive is a $1.5 billion fund that has 10 – 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 has accessed experts in industries such as energy, electrification, water, agriculture, food production, particulates, education and human rights. Just like ValueAct’s constructive, patient investment style, Inclusive will seek to earn the trust of managers, board members and institutional investors. Ubben serves as the portfolio manager and Eva Zlotnicka serves as Vice President. Zlotnicka has a pre-existing relationship with ValueAct through their interactions with Morgan Stanley, where she served as a vice president and U.S. lead for the Global Sustainability Research Team. At Morgan Stanley, she worked to help address and raise awareness of environmental and social issues both inside and outside of corporations.
Inclusive has reported a 5.65% position in Strategic Education for investment purposes.
Behind the dcenes
Inclusive (through its predecessor, ValueAct Spring Fund) first announced its position in the company on April 27, 2018, when Ubben expressed his belief that the company will thrive due to its technology capabilities. The ValueAct Spring fund has since been merged into Inclusive, but many of the core investment tenets that Ubben developed at ValueAct are central to Inclusive, such as using activism for change and investing in companies that are misunderstood or misperceived by investors.
Strategic Education is a for-profit education services company that conducts its operations primarily through its wholly-owned subsidiaries, Strayer University and Capella University. For-profit schools have historically had a bad reputation for charging a lot of money, getting students to incur a lot of debt freely given out by the government in order to receive either a bad degree or no degree. The Obama administration cracked down on for-profit schools by implementing a number of rules and regulations to hold these institutions accountable, putting much of the industry out of business. Now, with a new Democratic administration coming into office, these types of stocks are taking a hit again. Since June 8, the stock has declined by nearly 49%, compared to a gain of 12% for the S&P 500 over the same period.
This is where the misperception comes into play. Strategic Education is an accredited post-secondary institution of higher education that is using technology and artificial intelligence to improve the student experience and the value of the education while decreasing the cost of tuition from $15,000 per semester to $8,000 per semester. Additionally, they are implementing several positive initiatives to benefit both society and the company’s bottom line. The main project they have announced in September is WorkforceEdge, a joint venture between the company and Noodle Partners, an online program management company for not-for profit schools such as the University of Michigan and University of Tennessee.
Inclusive is a private investor in Noodle and was the lead in the company’s Series C funding and clearly integral in making this joint venture happen. WorkforceEdge is a program for corporations to develop a streamlined, efficient, and free online platform to offer tuition reimbursement for its employees at online schools. The Noodle relationship allows Strategic to offer corporate clients both in and out-of-network options, just like in healthcare. In-network options (i.e., Strayer and Capella) are often completely reimbursed by the host corporations, and out-of-network options (i.e., Michigan, Tennessee and other schools in the Noodle network) are generally subsidized by the host corporations. Moreover, Strategic has been able to further reduce tuition for corporate clients to $6,000 per semester at Strayer or Capella.
Another, yet smaller initiative Strategic has implemented is Sophia, a low-cost way for students to get college credits that will lessen the time they need to be enrolled in an online college. These initiatives, first and foremost, benefit society on many levels. They greatly reduce student debt, allow students to get a quicker, less expensive and more valuable degree and help corporations retain their employees. For Strategic and its shareholders, it gives them a streamlined and efficient source of student acquisition, something the company never really had. Accordingly, Strategic hopes to triple its B2B students from 20% to 60% over the next five years and reduce the loans per student from $8,100 to a loan free business that is paid primarily by student’s corporate employers.
To make sure that management is focused on the right factors to have sustainability drive shareholder value, the company’s senior management team is going to have their bonuses rely partly on metrics related to decreasing the amount of loans per student. While this could really hurt earnings in the short term, it could be very profitable for the company over the long run. It could change the company from one with perceived regulatory risk to no regulatory risk and one with no sales team relying on Google to acquire students to one with an enterprise sales system through HR departments at corporations. If accomplished, there is a huge opportunity for shareholder value creation. Right now, the company trades at approximately 6-times EBITDA while companies like Workday trade at over 12-times revenue.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.