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Today's Corporations More Like Conglomerates by Jordan at Investing Blog

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You used to be able to judge a book by its cover. There was once a time when General Electric meant just industrials, when Google meant search engine, or when Berkshire Hathaway was a textile company. But today, mega companies are looking to grow in any way imaginable, turning into virtual ETFs as they poke and prod around for new ways to drive profits.

I remember a few years ago when I first learned the extent of the General Electric empire. I had for a long time thought they made only industrial products. I thought the only GE products I owned were a few lightbulbs and some “general” electronics and consumer products. Nope, I was wrong.

General Electric was also one of the worlds largest financial companies. After looking at a credit card bill I read the words “GE Money Bank.” After some research, I found that GE Money Bank backed credit cards, made car, house and personal loans, and had one of the most highly leveraged loan portfolios of all financiers.

So when the lending bubble reached its peak in 2008 and a number of banking stocks got murdered in the process, I started rethinking GE. At this point, General Electric had evaded the eyes of investors relatively unscathed, and most were probably still under the assumption that GE made just GE products, not consumer loans.

Fast forward a few weeks and I went short, though not to the same degree that I would’ve liked. I was still lacking confidence that GE Money Bank was as big as I thought. Turns out it was, and I made an awesome profit, but that wasn’t the point. I had discovered something more important, that not all companies can be judged by their cover.

Newspapers and College

Newspaper and college don’t really have all that much in common, unless you’re the Washington Post. Yes, that Washington Post. While you might have thought an investment in the Post was an investment in print media and a pure advertising play, the company makes most of its cash from Kaplan Education.

Kaplan is a for-profit university, offering a number of degrees and even certifications for certain careers. For example, Kaplan Financial Education offers pre-licensing programs for those interested in financial services, including series 7, 65 and insurance certifications.

As you’re probably aware, the newspaper business doesn’t seem to be doing so well. Actually, its one of the hardest hit during recession (huge fixed costs!) The Kaplan division now makes up more than 60% of the company’s sales and 75% of its operating profits. Basically, a bet on the WaPo is a bet on the for-profit education sector.

Just one problem…

The Department of Education isn’t too thrilled with private colleges. Private universities are not state subsidized, and as a result, those who attend such universities typically leave with higher debt loads. Many are sold on the idea of high paying jobs, only to find that those high paying jobs no longer exist, or never existed in the first place, after graduation.

In response, the Department of Education is considering a change in policy, one that would limit or cut off student loans and grants to these institutions altogether. Thus, if you were planning on going to Kaplan University, you’d have to pay out of pocket or go to a private lender. Private lenders are significantly less likely to make a loan to a student than the DoE, which gives loans to everyone.

So what you might have once thought was a bet on newsprint and advertising is actually a bet on a Department of Education decision. As I’ve said before, those are the last kind of investments I want to own.

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

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