TWST: Many investors are of the mindset that stricter gainful employment and debt-to-income regulations could really hurt the postsecondary sector. Brandon, you don't think that's the case. Would you tell us why you don't think regulatory risk is as severe as many believe it to be right now?

Mr. Dobell: I guess it's four perspectives that I'd throw out there. First would be I think it's a generalization to say out of the gate that no one is going to be escaping all the current debates scot-free, and no one's going to get put out of business, although there's certainly just the potential for these institutions in some cases to be smaller on their revenue or enrollments. In some cases, you're going to have to look at changing programs. But in some cases, where you have the combination of working adult students, especially ones who are focused on bachelor's degrees or above, and where you've got a relatively low price point, something akin to an in-state tuition level or below, then I think you've got the potential to be in pretty good shape relative to the gainful employment regulations. What the Senate does or does not do obviously is a different part of the debate, but I do think the ongoing rulemaking sessions, which will include some pretty dramatic rule changes from the perspective of incentive compensation, gainful employment misrepresentations and credit hour definitions, with those new rules being in place relatively soon here, I'm not sure there is going to be legislative reaction that could do more damage than what is kind of already contemplated or built into the stocks from a perspective of gainful employment in particular. There's an awful lot of uncertainty, but I kind of come down on the side of the perspective that the well-run schools that are doing a good job with their graduates - these are certainly students that don't have a whole lot of options - those schools will end up being okay if not better off because all these new rules and the scrutiny is going to clean up this sector a lot like we saw back in the late 1990s. The schools that may get through are going to be operating in a more predictable but stricter regulatory environment, with fewer new entrants and potentially the same kind of market share opportunity to go after, just with fewer bad actors out there kind of bringing down the brands and bringing down the mindset of the overall sector.

TWST: James, what's your take on regulatory risk?

Mr. Maher: I would tend to agree with several things that Brandon said. I think what we're looking at here is really a process of separating the best from the rest. While we clearly saw in some of the recent Senate hearings that there have been some policies or some practices at least that need to be addressed in terms of overly aggressive recruiting tactics and what seems to be encouraging fraud, I do think that what we're going to end up with here is a set of rules, and I'm speaking mostly to what the Department of Education is promoting. What could come from the Senate Committee, I think, is far more uncertain and more exposed to the risk of unintended consequences. But if you think about what's being proposed by the Department of Education, I think that you're going to have some necessary changes and some adapting to the rules from the institutions. But I do think that as a group, you're likely to see those who are better operators, who are providing more value for their students, end up gaining at the expense of those who have simply not being providing sufficient education opportunities and enhancement to their graduates' career opportunities, because these are career-focused institutions after all. The one thing I would add is that the issue with the Senate, when Senator Harkin speaks about legislation rather than regulation, the scope of that committee is so broad, out of the depth of its responsibilities - when you consider that it's responsible for health education, labor and pensions - postsecondary education is not a huge slice of that entire responsibility. So I think the opportunity for unintended consequences if we see rapidly enacted legislation is something that I think has some investors and has the market worried.

TWST: Brandon had said he doesn't think anybody will go out of business as a result of this. I've spoken with some analysts who do think that is a risk. Where do you stand, James?

Mr. Maher: When we say "anybody," let's be even more specific about that. "Anybody," I would say, yes. I would think that there will be some institutions that are probably privately held, smaller, single-location institutions that will simply not be able to meet the standards - those who have been either sloppy in keeping the records and implementing good policies, or those that have just not been doing the job well. I think if we mean by "anybody" these large, publicly traded companies, then I would agree with Brandon. No, I don't believe that we are likely to see any of those institutions go away. They have the resources and I believe they will be able to adjust their policies and practices to conform to whatever ultimately is the requirement.

TWST: James said it's a process of separating the best from the rest. Brandon, who do you think are the highest-quality providers, and which names stand out to you as the most at risk for change in order to comply with stricter regulations?

Mr. Dobell: Let's start with some historical perspective first. Up until recently, I think the majority of the quality screen was a combination of looking at cohort default rates, maybe looking at bad debt, looking at the amount of Pell Grant dollars that the institution was receiving because that tends to be a proxy for the incomes and the demographics of that institution, and then including in there probably the types of programs or types of degrees. So intuitively you would look at a master's-based institution and say, "That's a better-quality school than a certificate-based institution just because the types of students that are attracted to a master's program tend to be more responsible, easier to deal with and better students than a certificate program." I'm not saying that their model is better or worse, just the investor focus or perspective on the quality of the institution increases as you go up the ladder for different types of degrees. I think on a go-forward basis, we're going to have cohort default rates and demographics to look at, but I think the argument will also shift a little bit to looking at if we have a common graduation metric, or if we have these repayment rates, as they're defined by the DoE, or we have a gainful employment calculation which relates income to debt. Those will be ways to also view the quality of the institution - but maybe a better term, the sustainability of that institution. You can have a very low-priced bachelor's program, for example, which historically may have been viewed as not as good as Strayer (STRA), for example. But if the gainful employment rules are put in place, the cost of the program is going to have to enter into the equation because the gainful employment rules have a certain amount of price control or at least pricing built into whether you're in compliance with the regulations or not. So historically, I think the easy stocks to answer that question would be Capella (CPLA), Strayer, probably American Public (APEI). I think DeVry (DV) got an awful lot of credit because of its consistent performance over a number of decades; as a fact they have never gotten in trouble with accreditors or the department of education. On the opposite side of the equation, it depends on whom you would talk to. But Career Education (CECO), Corinthian (COCO), ITT (ESI), even Bridgepoint (BPI) sometimes, often were viewed as lower-quality institutions by some investors we talk to.

In the context of the new gainful employment regulations, I think there are a couple of ways to look at it, but high-priced programs are at risk for a variety of reasons, including salaries that may not be going up that much and the amount of Pell dollars those programs tend to attract, which is the easiest part for politicians to look at because it's a direct taxpayer's subsidy and because the more debt you take on, the less likely you are to be in compliance with the gainful employment regulations. Arguably, if disclosure is going to be universal, people can price-shop a little bit more than they have in the past and the high-priced programs are going to stick out a little bit. I think the biggest difference that I would say, on a go-forward basis versus historical basis, for defining quality is the value proposition; the students are now going to have a bit more transparency, and therefore the price of the program, the graduation rates, the placement rates, the employability of those graduates will be easier to look at across the different companies, and that may shift the perception a little bit. If that's the case, then I think you'll see a company like a Grand Canyon (LOPE) move up the ranks a little bit in terms of the perception of quality. I think that Bridgepoint probably moves up. It's possible that Strayer's historical halo may be a little bit damaged or just looks a lot more like the same kind of students you would find at Apollo (APOL) or maybe at Grand Canyon, or parts of DeVry or parts of Education Management (EDMC). They just happen to do a very good job and a very methodical job growing the business, but the students aren't that different. A long-winded way of saying it really depends on how you look at it historically versus on a forward basis. But I think the industry is going to benefit, the investors will benefit from having a broader number of metrics to assess the quality of the institution and therefore assess the sustainability of that academic institution as well as the business model.

TWST: James, you have a "buy" rating on Corinthian, which is one company that has received a lot of negative media attention and in the minds of some has greater exposure to regulatory risk. Why do you think Corinthian is a good buy?

Mr. Maher: I think Brandon has framed it well in terms of how we're going to be looking at these companies going forward and even where historically they've come from. I think when you look at it, the overriding issue of course is regulatory, and I believe the themes and the intent, at least of the Department of Education, is to increase affordability and accessibility. When you think about those two goals, it really translates to a question of debt. And so I think the resolution of that is simply either to have less or to earn more, and that kind of dovetails with what Brandon was talking about earlier. Those that are lower-priced programs and the programs that are teaching either students at a higher level who already have achieved some level of academic and professional success, in other words those who are seeking to increase their success rather than to begin to get onto the professional ladder and to gain their first significant employment with skills, are going to have an advantage. You were asking about Corinthian. I think one of the questions that is going to be raised as part of this is for those students who have taken programs that are shorter duration and are not degree programs, but they're significant programs - from a public policy stance, these folks are coming to postsecondary education in a much more difficult circumstance - and so what is really the desired outcome? Are we simply going to say that the for-profits are going to be much more restricted based on the gainful employment and other regulations from trying to serve folks who will require Pell Grants, who have left high school often without a diploma, and your middle-20 student who is in both academic and professional terms really on the bottom rung of the ladder and in need of something in order to begin to move up and have better career opportunities? So when you look at those kind of allied health certificate programs that Corinthian, DeVry and that various others do, where do those shake out?

Specifically addressing a question about Corinthian, I did have a "buy" entering this summer; clearly that was not the correct call on the stock, but I do think that at this point, the company has been sufficiently discounted. Back to our earlier discussion, I don't see them going out of business by any means, and I think they will adapt. It may be a significantly different company, and their acquisition of Heald, I think, is part of that. And as they can begin to develop online programs and build them really from a perspective of knowing what these regulations are going to be, I think they'll have better opportunities in the future.

TWST: Brandon, last year at this time enrollments were up as a result of the recession. How are enrollments trending at this point?

Mr. Dobell: It's kind of a mixed bag. As with anything in this sector, there are varying answers, depending on what kind of student we're talking about. The companies that were clearly overgrowing or that saw a sharp acceleration in enrollments as we moved from 2007 to 2008/2009 - and those would primarily be ITT, perhaps DeVry's business and technology management segment, some parts of Apollo, like Axia especially in 2008, and various segments of perhaps EDMC or even Career Ed - those are going to naturally slow down. The question of how far they slow down or how fast they slow down is starting to be answered. We saw both ITT and DeVry show a pretty sharp deceleration in the most recent quarter. I think we've seen other companies, like Bridgepoint, Grand Canyon, Apollo and to a certain extent, I think, Strayer, in the last few quarters start managing the growth down to more sustainable or more logistically easy levels. I think part of that is just the policy environment; part of it is they recognize that for equity investors the risk of growing real fast was starting to bug people a little bit, and I think they recognize that the recession has probably caused a lot of people to take a look at school that may not be ready for it, and that ends up being a bad outcome for everybody - a bad outcome for the school because they spend money getting that student into class and the student probably doesn't stay more than a course or two, so it's a pretty bad economic decision for the school, and the student because they end with some debt or a bill they owe the school for not much, and it ends up being a bad deal for the taxpayer, which reflects poorly on the school, or policy or accreditation perspective. So I think the schools are all taking a look at that marginal student. The last two, three, four or five students that sign up, are they really the ones that are ready to go to school?

I call this whole trend "selective open enrollment." There are some students who probably shouldn't get the college education, at least not until they've figured out they can do it or what they want to do it. I do think you're going to see a more decided deceleration in start growth for shorter-term or ground-based programs relative to online bachelor completion. The bachelor completion student tends to be one that is not deciding between work or school; they tend to do both because they know and they can see the tangible benefits of getting their bachelor's degree or getting their master's degree. Going back to school for a shorter-term certificate, diploma or even an associate's degree tends to be a decision made because the work environment is difficult and this means you can get back in the labor force if you get a diploma or certificate quickly. As the labor market improves or even stops getting worse, those students start to make different decisions, where the bachelor completion student is going to do it no matter what because it's a two-, three-, four-year process, not a six-month process. No doubt the risk of a sector slowdown in enrollments exists because the job market is stable. The risk of a slowdown compared to where we were a year and a half ago in terms of growth rates, I think that's a healthy risk; it's more pronounced in certain types of programs or certain types of students, and less so with probably the upper end of the demographic and degree spectrum, with the one very difficult to gauge factor being the market share shift.

The states are under a lot of pressure and state subsidies that go to community college and state college are a significant amount of money every year. There's a lot of new people entering collegiate ranks and the states are going to have a difficult time enrolling more students when their budgets are way out of whack. So we've seen a lot of cases where community colleges have waiting lists for basic courses where the class sizes have exploded, where students can't get into a particular course because there is no physical room but also no scheduling room. That's why you're seeing, even with the higher price points, those types of student shifting to the for-profit schools or shifting to a state school, or if you're a working adult, you're shifting out of a state school because they don't have the right framework, right schedule and the right customer service. Those positions are being amplified by the schools' inabilities to enroll more and more students because of the tax burden or subsidy burden. So I wouldn't say that the states are under enough pressure that we're going to see a lot of students in every state rushing into the for-profit sector, but I do think it's going to mute the impact of a gradually recovering labor market because the lag on the states' budgets is pretty severe. As James pointed out, the schools that are providing quality outcomes, especially when they have clarity on this policy, they will continue to do a better and better job with the students. That increases the brand; it actually makes the business model better and allows them to continue to expand, grow, open new programs, all that kind of thing, without the detrimental noise from bad actors in the space. That ends up being a pretty powerful combination of growth drivers for the guys that are left. The companies that can make it through this policy environment, particularly if the states recognize they can no longer subsidize community college and state college at the levels they have in the past four or five years, should be in very good shape.

TWST: James, what are the factors that you see driving growth in the medium to long term for this space?

Mr. Maher: I think what we're looking at here in terms of growth, we should define that a little bit. I think growth may be more a factor of revenue and actually the earnings growth from addressing smaller but better prepared and more seriously committed student populations. To what Brandon was discussing earlier, I think we're seeing from Apollo, from Bridgepoint, various programs beginning to implement a program that's free to the student or the prospective student - a bit of an orientation, where they can begin to really understand whether or not the idea of going back to school and the reality of going back to school are aligned enough, that this is something they want to do. So I do think that what we're going to see over time is that innovation and really addressing the student population as customers to be served. Things like having new classes start weekly, flexible scheduling either on campus, online, hybrid programs, those type of things are far more common if not exclusively available at the for-profit institutions relative to a lot of the traditional schools. With the state colleges and community colleges under this enormous budget pressure that I don't see being alleviated for some time, I don't see them having the resources to begin to really innovate and create new programs and new methodologies of delivering their instruction at nearly the rate that they would like to because they're just simply trying as best they can to serve the population they've got. In some of these cases, what we're really talking about is that there is a taxpayer subsidy throughout higher education. The question really is from which pocket of taxpayers, state or across the full country, and at what point, upfront for the state and community colleges, or perhaps on the back end from defaults and other difficulties in grant programs in the for-profit sector? So when I look at growth, I think that what we're probably going to see most in the for-profits is the continuing ability to serve with innovation those higher-degree programs, mostly I would say online, but especially in hybrid programs, and in ways that the for-profits are able to innovate and to drive more and more resources behind addressing the unique and very stressed needs of their student population - the working adult - in ways that their competition outside the for-profit sector, the state and community colleges, simply can't do as much right now with their limitations.

TWST: Who would you point to as a leader in innovation?

Mr. Maher: I think if you look at some of the things that, for example, Bridgepoint is doing - they have weekly starts, as do some of the others, but they're also looking at their program called Constellation, which is bringing some of the textbooks and some of the materials into more of an online framework. It's a cost-saving potential for the student because they have estimated that their average is $150 per class per student in textbook expenses, and the Constellation program intends to offer textbooks developed by their own faculty and experts well beyond Bridgepoint - so this is not a wholly internal activity - but that these will be delivered for half of that cost. And because they would be online, it would have the rich data-mining capabilities of knowing what the students were reading, what they were doing, really being able to have the studying process be something that is now capable of being analyzed and assessed rather than something that you hope the student is doing and doing effectively. So I think that brings up a whole basket of possibilities further down the line, as we begin to get more understanding of what students are doing and doing effectively. You can begin to get adaptive curriculum, where you may see that students are consistently having trouble in a particular topic with a particular segment of that, and then address the curriculum, rather than just hoping that the seminar textbook on the topic is sufficient even though it hasn't been revised in five years.

TWST: Brandon, if you could make a recommendation to the management teams of postsecondary for-profit education companies, what would you like to see them do differently?

Mr. Dobell: A couple of things I'd point out. There are certain aspects of the traditional school model or process that this sector has ignored for a long time. First among those are alumni. All of us that went to regular schools, we've got a pretty strong connection with our undergrad or graduate institution for a variety of reasons. I don't think that connection would be any different for somebody that went to the University of Phoenix or Capella, or Bridgepoint or name your school, it's just these schools don't look at the students like that, in part because there has never been a need for an endowment system or fund raising, in part because so many of them are in different locations, they don't have that one central campus. They're not residential students, they're commuter students or online students. But these are also students who, without the aid of the private sector schools, probably would not have gone to college. So you could argue it's as important or more important for the for-profit sector to establish and maintain those relations, and that's amplified by the current environment, where the DoE and the politicians are hyper-focused on what the students got out of the education. There's not many ways to measure that other than to understand what your students are doing after graduation. Are they working? What are they making? All the success stories that offset some of the bad stories you hear. So I think some kind of a much more formal and much more proactive alumni, outreach, inclusion program, whatever, I think it has a number of benefits - not really for the business model, but I think for the brand - not only for DoE complaints, but just for the health of that institution to understand what they did and did not do well.

The second thing I would say is data transparency. If the push for a focus on outcomes and value propositions that started with gainful employment policies continues, it's going to have to include some way to measure what a student knew coming in and what they know going out. At the end of the day, because that's a large part of what the accreditation process looks at, those kind of metrics are going to work their way into all of higher education, not just the private sector schools. So the school's ability to understand what the students know coming in and going out, their ability to report that back to the authorities that it matters for, like the HLC and the DoE, for example, and then using that information to explain to the investors what they're doing right and what they're not doing right. I think Apollo, Capella, American Public and Bridgepoint in particular have done good jobs in the last two years of becoming much more transparent with this kind of thing - so not just giving the market a financial annual report, but an academic annual report. So saying, "We're not perfect, but here's what we're doing and here's where we're getting better at it."

I guess the last thing I would say is we've steadily seen the shift in the couple of years around the upfront process for new students. James made some points about the upfront remediation and diagnostics that the schools are doing, but one of the biggest issues that I continue to hear from investors is a question of why would somebody ever go to DeVry or Career Ed or Apollo? I think because the average person on Wall Street or on the Hill would have never even thought about going to one of these schools. For good or bad, it's just not the way that that will happen, and that really is a reflection of the brand, and it's a reflection of how little the schools have done to help anybody understand the value proposition for the student.

And that kind of goes back to my sustainability of the business comment. I'm a lot more comfortable that Capella's business is sustainable than I am about some parts of Career Education. Not that I'm not happy about Career Education, but I'm a lot more comfortable with Capella's because they've done a better job of explaining what kind of jobs the students get - here's where they work and here's what kind of salaries they make; here's the programs that we have that are different from what traditional schools may offer, here's how we're innovating and coming up with new ways to educate, here's how we're using technology. The schools kind of seem like a black box sometimes to investors. And when that's the case, then I think the automatic assumption from the investors and the accreditors and the DoE is, "A black box is bad." So more transparency of all kinds I really think makes a real big difference, particularly because when you get those videos from the GAO that show all these bad practices, it just increases the level of skepticism because there is so much financial aid money flowing through the schools. So do a better job of showing people why you're a good company, why you're not what that one video may have shown, what the students do get out of the education because that helps the brand, and a better brand is going to answer a lot of questions.

TWST: James, what would you recommend the management teams do differently?

Mr. Maher: I think I would echo some of what Brandon was saying. First and foremost, I think they need, in their own interest, to be more aggressive in disclosing. In a variety of ways, so much of this debate in recent months has been driven by anecdote, and you can find that in virtually any field there will be wonderful success stories and unfortunate ones, and those are really driving the conversation now. So I think one of the things that really was evident to me in the first Senate hearing was how even though this is an enormous activity - there are 19 million students in postsecondary education in the U.S. - there's really a lack of clarity around some of the most fundamental metrics: What is the graduation rate at these institutions and how exactly is it measured, and who's running the scoreboard? It seems like there's a lot of individual interpretations that create a perception that there may not be good, quality outcomes coming from a lot of these schools. And so I think the more we have an opportunity for the schools to disclose not just the metrics but also how they're measured and have been independently verified - I would suggest also to the managements that they engage more, and more constructively and more openly, with their critics because I think there are opportunities here to address some of these perceptions - that you'll hear blanket statements about for-profits, and there are good players and bad players, and I think you can comment especially upon those who are and want to be perceived as the best in the group to do a more effective job of really engaging that.

I think one of the difficulties we have with postsecondary education as compared to K-8 is that you don't have the annual examinations and some of the hard data that you have - yearly progress and things of that sort in K-8. Where you have that in the postsecondary realm, especially at several of the schools of DeVry for nurses, physicians, veterinary medicine, those that have licensing exams, that have a very binary outcome and can demonstrate empirically the quality of a program, I think those opportunities, where they exist, would be helpful for the programs as well to show simple things. But I think the more that they can move this conversation out of the realm of individual anecdotes and into standardized, well-accepted, well-defined and disclosed data, I think the better off they'll be.

TWST: Brandon, what is your number one pick in the space today and why?

Mr. Dobell: Number one pick right now is Grand Canyon, ticker LOPE. A couple of main drivers for that choice would be first, the quality of the institution I think is better than what the investor's perception is. And it's a combination of student mix, which is 40%, 45% graduate, and predominantly in terms of education and health care across both undergrad and graduate levels. They've got high-quality students in programs where you have some pretty tangible ways to measure the value, to measure the output of the education, like taking a test to become a nurse. Teachers, they've got to take a certification test and get a job. It's pretty easy for those students to understand what they're going to make when they finish school and where the jobs are. So the quality of the value proposition is pretty solid, only amplified by a relatively low tuition price point. So their ability to enroll students, graduate them and still remain compliant with some sort of debt-to-income ratio, I think, is better than even their repayment rates as published on Friday would probably suggest. Long term I like their differentiation partly because of the student mix and the programmatic mix, but I do think the idea of having a traditional ground campus as kind of the anchor, and then using that as either a marketing halo for growing the online business or because the ground campuses tend to have more full-time faculty, where they tend to be structured a little bit differently academically. You can take the best of a high-quality ground undergrad education and port that over to the online business, and I think that satisfies a lot of the concerns that the accreditation bodies and the DoE sometimes have about an online-only school.

From a financial perspective, I still think they've got a significant amount of operating margin expansion ahead of them, just driven by the scale of the operations, mix change in the student body and to a certain extent a tighter focus on the students who have higher propensity to graduate. It may cost you more to bring those students on board, but you're not bringing students on board who are going to leave in a quarter or two, or a class or two. Those are difficult students from a variety of perspectives, but from an investment perspective, they tend to be money-losing students because of the cost of bringing that student from an inquiry all the way to an applicant and to an enrollment. So I think there's a good amount of margin expansion in front of them. I like the way that they're managing their growth. They're focused on higher-quality students. I think that ends up making the business pretty sustainable for a variety of reasons, and I think the valuation is attractive on a relative basis or an absolute basis. I think with some policy clarity and their focus on those types of students that I've talked about, at the end of all this, they're going to be one of the ones left standing with a better and broader market opportunity in front of them. In the context of some of these perceptions of quality being driven by new or different metrics that we've seen historically, I think Grand Canyon stands up well on those new quality metrics as opposed to old quality metrics, and that should help the valuation on a relative basis pick up some good multiple points because I think they'll be viewed as definitely a sustainable growth story for a long time.

TWST: Same question to you, James. What is your top pick and why?

Mr. Maher: Unfortunately, my top pick is also Grand Canyon.

TWST: Is there anything that Brandon didn't mention that you would point out about the company?

Mr. Maher: I would say just a few things in addition to the many things he's hit on - several of the high points. They are in the process of investing approximately $70 million into the ground campus, which I think will create not just the marketing opportunity, but a vibrant and profitable operation there in the campus itself. Grand Canyon, remember, is a 60-year-old institution. This is not a new business, even though it's new probably in the investors' minds and also in perhaps the public's mind. And being in the Southwest - California, Nevada and Arizona - they've suffered very much in this recession. Unemployment rates in Nevada and California are substantially above the national average; their state and community college systems are under extraordinary pressure. So if you think about the competitive position, I think Grand Canyon does well. I think management also has an advantage in that the CFO and CEO both came from Apollo, so they had a lot of the years in the industry and they know the things that Apollo did exceptionally well and the things that were more challenging, some of the things that they might have done differently. They also have been at Grand Canyon now for only a little over two years, so while they've made a lot of the changes, and process improvements and the like that they would have wanted to make since they arrived, I think they still have more opportunity at Grand Canyon to improve those things than perhaps some of those institutions, like, for example, Bridge Point, which was really founded to be what it was only four or five years ago, rather than the types of changes that they're looking to make. So I think Grand Canyon has a very good opportunity longer term.

We've been speaking about brand. I use a nonoperational definition for brand; it's a set of characteristics that create a set of expectations among customers, competitors and in the market for human and financial capital. I think the opportunity for Grand Canyon, and really for all of these schools, to enhance the characteristics of their programs and therefore the expectations of the broad constituencies that they are involved in are pretty significant. I think Grand Canyon right now and, as Brandon said, on a valuation basis, all of these stocks are severely beaten down; they're not trading on by any means financial fundamentals but on regulatory concerns, if not speculations. So after the storm of uncertainty and regulatory change passes through, then I think what we'll have is stronger, probably fewer, organizations, with very good growth prospects. And I think Grand Canyon will be among the winners.

TWST: Is there a number two pick you would point to, or a name that is a particularly interesting right now?

Mr. Maher: Although I have a "hold" rating on the stock, I think American Public Education is a very interesting story right now. As the low-cost leader for bachelor's tuition, and for that matter master's as well, and also one of the smallest in terms of just revenue and pure opportunity to grow, I think that they are very well positioned relative to the regulatory questions because their recruiting practices have not been thoroughly aggressive. I don't think they'll have much difficulty at all adapting to incentive compensation restrictions and likewise gainful employment when your full four years of the bachelor's degree only cost $30,000, including books. I don't think they'll have much difficulty there. The key unknown is when will the active-duty military students return to taking classes at the same rate? So there is a great deal of uncertainty there. But if you look at the civilian business, it's growing rapidly. They have this new opportunity working with Wal-Mart (WMT) and their associates, 1.4 million people, especially well geographically dispersed, because Wal-Marts tend not to be in urban areas but a little outside of those, where an online distance learning opportunity like American Public's offering would be more compelling, and it gives them a chance to expose the American Public University brand to more students. The American Military University is certainly well known, especially within their core market of the active-duty population. But American Public University is much less so, and I think they have that opportunity. It is now like the whole group is under this cloud of uncertainty - in their case, more about the active duty military group - but I do think American Public will recover and have the opportunity to grow rapidly for some time.

TWST: Brandon, are there any other interesting opportunities that you would like to point out?

Mr. Dobell: I guess the one I would probably focus on behind Grand Canyon and American Public, a little more controversial, which would be Bridgepoint. I think they're viewed in a negative light in large part based on how fast they've grown the past year or so, from a very small base to a very large company in a very short amount of time. I think that's really concerned some investors, particularly in the context of how much scrutiny there is around the online business, fast-growing companies, those kinds of things from both the Department of Education as well as the accreditors. So I think Bridgepoint has been under a pretty severe cloud of skepticism from the investment community for a while now. It hasn't been helped by program reviews, OIG inquiry, those kinds of things that have popped up since the IPO. They've done a decent job of moving through those different inquires as well as there remains a pretty significant amount of concern about what the OIG/DoE inquiry would turn into. But the flip side of all that is, like James' comment on Corinthian earlier, it's more than discounted in the stock. The company has made a lot of good moves towards changing the perception of the type of institution they are, both through being more transparent with graduation rates, salaries, debt levels, academic outcomes, those kinds of things, as well as trying to do as much as they can to be as transparent around their incentive compensation practices and what they're doing to change those, trying to put orientation programs in place so they do leave out the students who only make it a course or two and not complete their degree. They recognize that slower but more quality growth focus.

From policy perspective, because, like American Public, they've got a pretty low tuition, I think they're going to be in great shape from a gainful employment perspective. There is going to be some lingering questions around the incentive compensation rules because of their rapid growth of the past year or two, but I feel pretty comfortable that given the time frame for implementing those changes, they should be in pretty good shape there. But I guess that's a point of skepticism. You've got a pretty good company that doesn't look an awful lot different from the cross-section of Apollo, Grand Canyon, Strayer, Keller Graduate School, American Public; they all kind of have some of the same student demographics. And with the low price points that they offer, I think they're going to be one of those businesses that has an easier time attracting people than most. There's a lot of negative sentiment built into the valuation here, which I think over the next six months, if not a little bit sooner, you'll get some clarity on a number of those issues, like certainly broader policy, incentive compensation gains, the OIG inquiry. And I think those will help to solidify the stance that these guys are running a business that looks like everybody else's business and therefore shouldn't deserve a huge discount in the multiple.

TWST: Thank you. (MES)

Note: Opinions and recommendations are as of 08/18/10.

BRANDON DOBELL

Co-Group Head

William Blair & Company, Inc.

222 W. Adams Street

Chicago, IL 60606

(312) 236-1600

(800) 621-0687 - TOLL FREE

www.williamblair.com

e-mail: info@williamblair.com

JAMES MAHER

Senior Analyst

ThinkEquity LLC

600 Montgomery Street

San Francisco, CA 94111

(415) 249-2900

www.thinkequity.com

e-mail: info@thinkequity.com