Dear Mr. Berko: What do you think of buying $50,000 worth of the recently issued 3.75 percent Illinois general obligation bonds due in 2028? And please tell me about Instructure. If you approve, then I’ll buy 1,000 shares. — RS, Akron, Ohio
Dear RS: If you understand and can afford the risks, then buy the general obligation bonds. These GO bonds are backed by the full credit and taxing power of the state of Illinois rather than revenues from a specific project, such as a bridge, a sewer system or a toll road. These tax-free bonds were issued with the dark hope that Illinois can repay its obligation via taxation and other revenues. Knowledgeable investors believe that’s unlikely, thanks to Michael “Mad Mike” Madigan, elected to the Illinois House in 1970 with $30 in his pocket. Today he’s speaker of the House and a multimillionaire.
The state issued $6 billion worth of GO bonds to shrink its unpaid $17 billion backlog of accumulated merchant and vendor debt. These bonds are rated BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service. Those ratings are investment-grade (though just barely; they’re a hair’s breadth above junk). However, a longtime acquaintance of mine at Moody’s isn’t so ebullient. Privately, he believes those bonds should be rated Ba1, which is non-investment-grade and speculative. He says the underlying foundation for Illinois’ financial system has been destroyed by the Legislature. Among the state’s most daunting financial problems is its pension plan, which is underfunded by $251 billion. It won’t be a picnic when 815,000 employees learn that their benefits may be reduced. I believe there’s an 80 percent chance these bonds will pay interest till maturity and then redeem at par value. And I think there’s a 20 percent chance these bonds will pay interest till maturity and then have their debt restructured so that you can get back 70 cents on the dollar. It’s a fair dinkum gamble!
Instructure (INST-$35) sells a cloud-based online learning platform called Canvas to universities and high schools. Online learning, sometimes called e-learning, is attracting a hugely growing number of students because it’s cheap, easy and fast. About 35 percent of college students are enrolled in online courses, and according to a Columbia University study covering hundreds of thousands of classes, the results are distressing. Students taking online courses fared poorly compared with students taking traditional courses.
Online learning is basically second-class learning and is changing the future of education, just as Amazon.com changed the future of retail. Online learning, in which there’s no interaction with classmates or professors, stinks. Everyone passes, and courses are as cheap as chips. That’s the attraction to Indiana University, Iowa State, the University of Minnesota, Florida State and numerous other schools, including Harvard. But if you were to choose between a doctor who got his degree online and one who attended traditional classes and interacted with professors and classmates, which would you choose? As an employer, would you be comfortable hiring an online-trained accountant, chemist, journalist, psychologist, veterinarian, accounts manager, product salesperson or civil engineer? I wouldn’t! This is the confirmation of the dumbing down of America.
However, INST, whose share price has doubled in the past 11 months, has become a hot small-cap stock with a potentially impressive future. Revenues have grown more than sixfold since 2013, from $22 million to an expected $142 million this year. And Wall Street believes that in the next few years, revenues will explode as students flock to online courses with lower standards and cheaper, easier and quicker degrees.
INST has been profitless since inception and may remain so until revenues reach the $600 million to $700 million range, though it has no debt. The company has over 1,000 employees, 28 million shares outstanding and $35 million in the bank. It may soon need more money, but most big names on the Street are enormously bullish on INST. A 1,000-share purchase might put a huge smile on your face by 2020.