The secret of success in property, according to the popular saying, is ‘location, location, location.’ And the mantra for stock market investors right now could have a similar ring – ‘education, education, education.’ This small and rarely noted sector of the stock market is delivering some great returns just now, and for this we can offer just a small vote of thanks to Gordon Brown.
Education is Gordon’s answer to the unemployment crisis. How many times have we heard him say that the unemployed will be sent on training courses to ‘help them back into work’? So, lots of young people go off to college. They sign up for courses in IT, cookery, hairdressing and physiotherapy... preparing themselves for jobs that seem scarcely more likely to exist when they graduate in two or three years time than they do today. No matter. Politics is all about offering palliatives today and postponing the grim day of reckoning until tomorrow, so we should expect no more.
I am not so sure that we can just educate our way out of our economic difficulties. But while the thirst for knowledge – or perhaps just the alternative of the dole queue – is swelling the number of fulltime students, we can at least try to make some money from it. I’ve found some exciting companies in this sector but first, some background...
Great news for education providers
Setting my cynicism aside for a moment, Brown’s focus on unemployment might actually be what the country needs. In my regular conversations with leaders of small businesses, too often I hear them complain of the difficulty of attracting suitably qualified staff.
Supposedly this is a country that knows it cannot compete with the low wage levels of overseas, but can beat the competition through sheer brain power. And yet when the chief executive of a small electronics business to whom I spoke last week wanted to recruit some IT boffins in order to push development of new products, it was not until he opened an office in Bangalore that he was able to recruit the necessary talent...
Both Barack Obama and Gordon Brown have suddenly latched onto science as a way out of our difficulties. Recovery from the recession, they tell us, will be led by the ‘industries of tomorrow’ – those that address energy shortages, climate change, and the environment. Innovation will be the key. Innovation that is not found in the sweat shops of Guangdong but in the glittering universities and colleges of America and the UK.
But, let’s face it... we have long had a superior education system. Go to many of the poorer countries of the world and you will find parents that crave a British education for their children. But this educational superiority does not necessarily lead to economic success, unless it is mixed with entrepreneurial zeal and encouraged by a government that does not tie up small businesses in red tape.
Making money out of the knowledge boom
On 29 April, a small company called BPP Holdings (ticker: BPP) received a take-over approach. At 620p per share this was pitched some 260p above the prevailing share price. The bid came from http://www.apolloglobal.us/" target="_blank" style="FONT-WEIGHT: bold; COLOR: #006b99;">Apollo Global, a US provider of education services that is backed by the giant Carlyle private equity group. Clearly they can see something in BPP that has escaped UK investors and this can give us clues to other opportunities in the sector…
BPP runs training courses, especially in finance and law. In fact, staff members here at Fleet Street Publications regularly use BPP’s services to keep them up-to-date with the regulatory requirements of the financial sector.
Such qualifications are always sought after, but perhaps even more so when jobs are hard to find. Students sign on for two or three years, allowing BPP to see a large part of its income in advance. Capital investment does not run far beyond some classrooms and overhead projectors. No more teaching staff need be hired than is necessary.
It is a nice little earner, but clearly the BPP opportunity is gone – can we find others? There have been a few companies that have served the education market over the years. There is RM Group (ticker: RM.) that installs IT systems in schools and Findel (ticker: FDL) that supplies everything from desks to chalk. DRS Data & Research Services (ticker: DRS) has devised automated marking systems. Pearson (ticker: PSON) is the giant of the sector and the supplier of many schools’ text books.
All-in-all, the education sector looks set to benefit from the government’s initiatives, and the focus on innovation. It’s an investment trend that looks set to run and I’ll be seeking out new ways to play it in the small cap section of the market.
Good investing,
Tom Bulford
For The Right Side
Note from the Publisher: Tom Bulford is the editor of an excellent twice-weekly free email, called The Penny Sleuth, where this article first appeared. If you would like to read Tom’s articles and insights on the day they’re published, just sign up for The Penny Sleuth for FREE here.
MARKET NOTES
Low demand for big-ticket items deflate Japan’s lure
SHIVVY ARORA
The severity of Japan’s recession is quite simply astounding. The world’s second largest economy, which is hugely dependent on exports, has been left in its worst economic state since World War II.
Consumers are buying much fewer of the gadgets and cars that Japan is so famous for. The chain reaction is very worrying - exports decline so manufacturing production slumps. Weak orders mean supply contracts. Unemployment rises, pushing consumers to spend less - so domestic demand suffers too. That’s a double blow.
Take a look at the chart below. It shows monthly trade of Japanese imports (red line) and exports (blue line) in thousand billion Yen, from 1995 to date. Exports declined by a whopping 26% in the first quarter of this year. You can see the incredibly steep decline in imports as well.
Japan’s staggering plunge in exports is killing its investment potential
Source: Reuters EcoWin
The unprecedented fall in exports has forced companies from Toyota to Hitachi to slash production, workforces and wages. Even the country’s PM Taro Aso recently acknowledged that corporate sector weakness is spreading to households.
Japan is in a fragile state and hugely reliant on exports. External demand isn’t picking up as consumers across the world stop buying big-ticket items. The country’s current budget is in deficit by approx 7% of GDP. Its economy is forecast to contract by 5% this year.
You’d do well to curb major exposure to Japanese companies. Despite being an emerging market economy, China is a much better bet and likely to pip its mature counterpart to the finish line.
The Daily Reckoning – Washington will make a bigger mess of the auto industry
BY BILL BONNER
London, England
Tuesday, 26 May 2009
Yesterday was a holiday both here and in the US. Little news from those quarters.
But while Americans and Brits were enjoying their barbecues, the rest of the world turned.
“Obama plans ‘leaner’ car industry,” says the BBC.
While most readers will focus on the last three words of that sentence, we direct your attention to the first two. The subject is the important part... not the predicate.
That the car industry may or may not get ‘leaner’ is of little interest to us. It will do what it needs to do. But that the president of the United States of America is now creating the business plan for an automobile company is surely a sign of something big. The world has already turned... perhaps more than we realize.
It was only a few months ago, we’re almost sure, that a private company figured out for itself how it would compete. If it was well-managed, and lucky, it would grow. If it made a serious mistake, it would go out of business... leaving the premises vacant for another entrepreneur.
Americans not only accepted this model, they applauded it. They thought the “free enterprise” system was the best in the world. They believed it was responsible for their wealth, their progress and their place in the world.
Now, they seem to have come to believe something else: that the president of the United States – an elected politician – should have a direct say in how individual private enterprises are organized and run.
But these are the same people who elected Bill Clinton and George W. Bush – twice! They’ll believe anything...
“Power Pendulum Swings Toward Washington,” says another paper.
People think capitalism has failed them. They never understood what capitalism was - and wouldn’t have wanted it at all if they had known what it was all about. Still, that doesn’t mean they won’t come up with something worse...
Capitalism is full of what Galbraith called “innocent frauds.” The capitalists try to exploit the workers. The workers try to take advantage of the capitalists. And the managers try to put one over on them both.
But now, the innocent frauds of capitalism are being replaced by the brute force of government. Now, the Obama team is calling the shots itself.
What does Barack Obama know about the car business? Ha... ha... ha...
Oh, you and your silly questions...
Read on...
To read the Daily Reckoning in full, click here.
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