by David Safier
K12 Inc., the for profit, publicly traded online charter school corporation and parent company of Arizona Virtual Academy, has seen its stock price rise over the past year as profits have increased. But one hedge fund thinks there are dark clouds on the horizon and is shorting the stock.
"This is a growth story that is about to crash," [Whitney] Tilson, who runs Kase Capital, said at the Value Investing Congress where he spoke publicly about his short bet for the first time.
Tilson criticized the company's aggressive recruitment policies, saying that even students who are unsuited to online learning and might perform better in a bricks-and-mortar school are signed up.
"They will do business with anyone who has a pulse," Tilson told Reuters after making his case against the company with a power point presentation.
K12 did not immediately return an email seeking comment.
He also said K12 might face obstacles if tax regulators were to investigate how the for profit-company is making money on charter schools that are generally non-profit operations. "If the IRS starts to challenge them on this, it is game over," he said, referring to the Internal Revenue Service.
Like all stock shorting, this is a bet based on a hunch. I hope it's a good hunch. Profit for K12 Inc. online schools is based on volume, and that means intense and continual recruiting. The churn rate -- the number of students who leave every year -- is around 30%. That means they have to replace at least a third of their students every year if they want to stay even and grow just a little. That takes a whole lot of selling to parents and students, regardless of whether they'll well suited for at-home, computer-based learning.
There's another Arizona connection beyond Arizona Virtual Academy. Craig Barrett, ex-CEO of Intel and current president and chairman of BASIS schools, is a national board member of K12 Inc., something I've never heard him talk about in public. And he's in public a lot. He's Brewer's main education spokesman and one of the prime movers behind the controversial Common Core. He's proud to tout all his credentials except his connection to K12 Inc. Some journalist, while their having a chat with Mr. Barrett, should ask him what he thinks about corporation's questionable educational successes and notable failures.