How To Invest Alongside Goldman Sachs

Anytime Goldman Sachs (NYSE: GS) is involved in something, investors take notice.

Goldman has received plenty of bad press lately, but the fact remains that they are Wall Street’s most powerful name. They are among the largest global investment bank in the world, and offer just about every kind of investment product known to man.

They have $880 billion dollars in assets. And despite a large revenue drop in 2009, they still had net income of almost $14 billion. The firm’s traders didn’t lose money a single day during first quarter of 2010.

And while it attracted SEC attention, it was Goldman that packaged those toxic mortgages into derivatives and sold them to pension funds, then turned around and shorted them. If you’d shorted the housing market you would be sitting on a fortune.

So if Goldman sells a company and doesn’t hold on to any stake, then it makes sense to not buy the company. You may even want to short it.

But if Goldman sells part of a company and holds onto the rest, then you might have found your next investment. More often than not, Goldman Sachs is going to be on the right side of a trade.

That’s exactly the situation I’ve uncovered.

When Goldman Sachs and Providence Equity Partners purchased a relatively unknown education company back in 2006, then turned around and spun it off late last year (but with Goldman Sachs keeping 38% for itself), investors had a chance to piggyback their play on unemployment… and still do.

Goldman Sachs and Providence obviously see something in this education company that the market appears to be missing. That’s the fact that this company’s schools offer different specialties than its competitors, and offer ones that will be increasingly relevant going forward.

Particularly compelling is that it has been quietly buying up art institutes all over the country. These institutes offer associate’s, bachelor’s, and master’s degree programs, as well as selective non-degree diploma programs in creative professions — graphic design, web design and interactive media, among others.

Unless you’ve been living under a rock, you know that the world of entertainment content production and consumption is undergoing an extraordinary change. All of the above specialties are in high demand, and will be even more so as the Internet and other forms of media evolve (think of the proliferation of smart phones’ content during the past few years).

Meanwhile, the company also offers degrees in more traditional areas like behavioral sciences, education, business and nursing.

These are the core reasons why Goldman still owns a big stake in Education Management Corporation (Nasdaq: EDMC).

Before I realized Goldman owned a stake, the company first came on my radar because mutual fund manager extraordinaire Ron Baron (one of the Forbes 400 richest Americans) has held competitor DeVry Inc. (NYSE: DV) for about 20 years. But I think DeVry has seen the last of its high-growth days.

The secular trend, however, remains for this sector. Mr. Baron himself says, “America’s state and community colleges, due to constraints on state budgets, are reducing enrollments and programs, creating even greater demand for proprietary education. Because proprietary institutions [like DeVry and Education Management] provide their graduates with an ability to obtain gainful employment, we think the growth prospects of these institutions remain favorable.”

I would like to see Education Management’s profit margins continue to strengthen. They came in around 12% last quarter — bounding higher from just 3% the quarter before. This, however, is still lower than both DeVry and Apollo Group (Nasdaq: APOL).

The less stringent gross margins (revenue – cost of goods sold), however, are almost equivalent at more than 50%. This means its profit margins are directly related to expenses, which can be brought under control. I trust management will see these numbers improve as time goes on, especially with 38% owner Goldman Sachs breathing down their neck.

Action to Take –> Shares of EDMC and other education companies have seen wild swings during the past couple of months. Much of this comes from uncertainties regarding an upcoming proposal by the Department of Education to reign in excessive student loans.

But if you’re an aggressive investor, I think it’s looking like a great time to buy. With Goldman Sachs backing the shares, I think the drop in price is an overreaction. There’s simply too much demand, and the government will not let education falter at a time when it is needed most.