Sector Snap: Proprietary Schools Up on GAO Report

Shares of companies that run for-profit college-level schools soared Monday after a much-anticipated Government Accountability Office report offered only a relatively mild criticism of the sector.

The GAO report on proprietary schools, which had been requested by Rep. Ruben Hinojosa, D-Texas, focused on student default rates and so-called diploma mills.

But the report’s conclusions were far milder than some investors had feared and stock soared, even as the broader market declined.

"The reason the group is up today is because the GAO report was published, and its message is less severe than the most severe case anticipated. In other words, that severe case would have been the GAO directly citing major problems in the proprietary schools sector," Stifel Nicolaus & Co. analyst Jerry R. Herman said in a telephone interview.

"The GAO did not outright say that proprietary schools are doing a consistently bad job on cohort default rates and administration of Title IV funds."

BMO Capital Markets analyst Jeffrey Silber said investors had braced for a far more negative conclusion.

"We believe this should come as relief to investors who may have been expecting the GAO would use a broader brush to paint the sector in a negative light," he said.

A spokeswoman for Rep. Hinojosa said he planned to hold hearings on the GAO report.

In afternoon trading, shares of San Diego-based Bridgepoint Education Inc. jumped $1.34, or 8.2 percent, to $17.65, and shares of Phoenix-based Apollo Group Inc. climbed $4.51, or 6.6 percent, to $73.54.


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