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Education Stocks Keep Their Grades

By Michael Jaffe Shares of for-profit education companies came under pressure Nov. 17 after a press report that a former director of career services at Gibbs College in Montclair, N.J., a unit of Career Education (CECO

; recent price, $48), is suing the school for wrongful termination, claiming she was fired for refusing to falsify student records. Career Education said in a statement it "believes the lawsuit is without merit and intends to vigorously defend itself."

While it's too early to comment on the suit's merits and its potential outcome, we at Standard & Poor's have no reason to think that the alleged wrongdoing is systemic. S&P analyst Massimo Santicchia estimates that the Gibbs Montclair campus has 3% of Career Education's student population, and the nine Gibbs schools represent about $150 million of S&P's 2003 revenue projection of $1.1 billion. While Santicchia suspended his 5-STARS (buy) ranking on the stock on Nov. 17 after news of the lawsuit, he reinstated it on Nov. 18. His 12-month stock-price target is $60.

TOP PERFORMERS S&P also maintains its recommendations on other members of the for-profit education group. Although we're somewhat concerned by the Gibbs Montclair allegations, we have no reason to believe they should have an impact on other for-profit school outfits. The group has been among the best-performing subindustries for the past few years, and we expect further gains in coming periods.

Investors flocked to these shares as weakening job markets led many people to seek additional education, which positioned the sector for a strong growth phase. Yet with rising ambition levels also prompting many workers to go back to school to enhance their skills, we expect education demand to remain strong even as the economy bounces back.

We're maintaining our 5-STARS recommendation on Corinthian Colleges (COCO

; $62) with a 12-month target of $83, and our 4-STARS (accumulate) opinion on Apollo Group (APOL

; $66) with a 12-month target of $86. Analyst Jaffe follows for-profit education stocks for Standard & Poor's

S&P analysts Bryon Korutz and Massimo Santicchia also contributed to this report

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