School shares rally on loan legislation

By Helen Chernikoff

NEW YORK (Reuters) - Education company stocks, long battered by the credit crunch, rose on Thursday amid heightened institutional interest, a takeover rumor and a sense the federal government would ensure that students have access to loans.

"We've seen the bottom," said analyst Alex Paris, Jr. of Barrington Research. "The sell-off was overdone."

The share prices of for-profit education companies have taken a hit since the housing-led credit crunch infected the student loan industry. Lenders have raised credit standards, generating fears the classroom door would close altogether on high-risk student borrowers.

But on April 9, a congressional committee approved a bill its sponsors said would keep the loan money flowing by letting the U.S. Department of Education buy federally guaranteed student loans from lenders unable sell them.

The shares of ITT Educational Services Inc (ESI.N: Quote, Profile, Research, Stock Buzz) and Corinthian Colleges Inc (COCO.O: Quote, Profile, Research, Stock Buzz), for example, each rose about 10 percent intraday on the news, despite recent downgrades for both to "neutral" from Piper Jaffray analyst Mark Marostica on credit concerns.

"We feel this lower multiple more appropriately reflects the challenging lending environment," he wrote in a note to clients about ITT Educational, whose price target he also lowered to $56 from $77.

He lowered his price target for Corinthian to $8.50 from $13.

But investor optimism that lawmakers, especially in an election year, would act to keep higher education accessible trumped the downgrades, said Signal Hill analyst Trace Urdan.