Why Your Financial Advisor Doesn’t Recommend Edtech Stocks


Why Your Financial Advisor Doesn’t Recommend Edtech Stocks

By Michael Winters     Aug 23, 2016

Why Your Financial Advisor Doesn’t Recommend Edtech Stocks

Let’s pretend that you and I are both rich.

Like, filthy rich. Scrooge McDuck or Tony Stark rich. The kind of rich that would let us both splurge large sums of money on silly bets.

Now pretend that it’s late 2011, and we get into a debate about education technology. I’m excited for the industry’s future, and I think we can make money investing in publicly-traded edtech companies. You disagree and say that we’re both better off investing across a wider variety of industries.

I think you’re wrong, so I propose a bet: We’ll both invest in a basket of stocks on January 1, 2012—mine representing the edtech industry, and yours the whole economy. At the end of five years, whoever’s portfolio is worth more will be the winner.

Four and a half years later, you’re kicking my butt.

Basket Weaving

Before we dive into the results, here are the details. Your investment, in the economy as a whole, was easy. You parked your money in the S&P 500, specifically in the Vanguard index fund which tracks the biggest companies on the NYSE and NASDAQ exchanges.

My edtech portfolio was more difficult to assemble. Investment firms certainly track the technology sector, and some track the education sector, but there is no established benchmark for edtech companies.

So we created our own basket—or market index—of edtech stocks. We tried to avoid big tech companies like Google or Apple that offer education products, corporate LMS's, for-profit higher education, and companies that operate brick and mortar schools. (We’re focused on edtech, after all.) Back in 2012, there were seven companies that fell into this category. As others joined the public markets over the years, we added them into our basket and adjusted our tracking of the S&P 500 accordingly, to ensure that we could compare the two properly. By the middle of 2016, our edtech basket contained 11 different companies.

Once we each had our groups of stocks, we put down our money and started the long wait.

Heads, you win. Tails, I lose.

As of August 15, 2016, the value of my edtech portfolio has grown 16 percent. In contrast, your investment in the S&P 500 has increased by 53 percent.

If we had both invested $1 million back in 2012, you would now have $1,526,000 and I would have just $1,160,000. You're currently winning the bet.

Additionally, you have been winning almost the whole time. Out of the roughly 1,150 days that the market was open between January 1, 2012 and August 15, 2016, I was only winning the bet for 22 days, way back from January 10, 2012 to February 9. The next day, the S&P took a lead that it hasn’t relinquished since.

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Not all edtech stocks in our basket are dogs, however. The modest performance of my basket overall hides wide variation in performance between individual companies:

Out of the 11 edtech stocks, 2U ( TWOU) is the biggest winner, worth 151 percent more than when it began trading in March 2014. Cambium Learning Group (ABCD, maker of Learning A-Z, Voyager Sopris and other products) takes silver, its stock worth 54 percent more than at the start of the wager. On the other end of the scale, when SMART Technologies, best known for its interactive whiteboards and clickers, was acquired for $4.50 a share in May 2016, it was down 88 percent from January 2012.

Edtech also looks bad as an investment when we compare it to other traditional stock sectors, using data from Google Finance and Vanguard. Out of 10 major categories, only the energy sector was a worse investment over our chosen time frame, losing 18 percent of its value. While the investment in edtech at least made money over that period, the returns were far less than what the health care, consumer cyclicals and general technology sectors enjoyed.

Dividends vs Dividends

So while studies continue to show that education provides ample personal dividends by increasing lifetime earnings, it seems that the same cannot be said of fiduciary dividends. For those of us who believe in the power of technology to improve education, these results are disappointing.

Trace Urdan, a research analyst at Credit Suisse, attributes some of this underperformance to skepticism about edtech stocks in public markets. “Private investors [e.g. venture capital firms] see K-12 tech as the last frontier for disruption. But public investors are more concerned with earnings today.” Urdan has observed that the uneven adoption of tech around the country has given pause to edtech-minded investors. Until they can be sure that tech will be adopted at scale, “public market investors are going to be very, very skeptical.”

The modest returns from trading edtech stocks may also be hurting private investment, according to Christopher Nyren, founder of edtech seed investment and advisory firm Educated Ventures. “As with the broader tech markets, you need outsized exits to fuel further venture investment in edtech startups,” he wrote in an email to EdSurge. “We need public market IPO investors to believe in these [companies’] stories and valuations.”

Both Nyren and Urdan also pointed out that the results of the wager could have changed dramatically depending on the stocks selected. Including for-profit education companies like Apollo Education or Devry would have decreased edtech’s return further. Including Alphabet or Apple might have been enough for edtech to win the bet.

However, it’s important to remember that past performance of edtech stocks is no indication of future performance: There is cause for optimism.

First, this experiment may paint edtech companies in an artificially negative light: It’s difficult for any basket of stocks to beat the S&P 500. According to Bloomberg, in 2014 only 20 percent of mutual funds were able to outperform their benchmarks. Our edtech basket is right in line with this number: Two stocks out of 11 (2U and Cambium Learning) were able to beat the S&P.

Second, the past five years have been uncertain ones for education companies and their investors. Since the beginning of our bet, several of the companies in our edtech basket have updated (Scholastic and Houghton Mifflin Harcourt are examples) or even sold their legacy businesses (Pearson) in order to refocus their businesses. Major transformations like these breed uncertainty about future earnings, and deflate stock prices. Now that these shakeups have been completed and the edtech industry is maturing, uncertainty may begin to decrease, allowing stock prices to rise.

Indeed, compare the edtech basket of stocks to the S&P 500 since January 1, 2016 and the results are much closer than over a five-year timeframe. As of August 15, edtech stocks are up 8 percent since January 1, with the S&P just ahead at 9 percent. For several days in July and August, edtech had even outgained the rest of the market in 2016.

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Alas, this year’s rally won’t help me with our five-year bet. Barring a freak market crash where value in every other sector but edtech plummets, you’re going to win the wager handily.

But hey, I’m an optimist about the vitality of the business of edtech. So whaddya say: Double or nothing?

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