Whitney Tilson pitched his biggest short today at the Value Investing Congress. We had live coverage of Tilson explaining why he is short K12 Inc. (NYSE:LRN). Tilson has sent a follow up email to investors explaining why he believes the company is such a good short. Below is Tilson in his own words.
From Whitney Tilson
At the Value Investing Congress this afternoon I presented the attached presentation entitled: “An Analysis of K12 (LRN) and Why It Is My Largest Short Position”.
I know the company and the space well (K12’s primary business is running online charter schools), and it’s a VERY high conviction short due to the fundamentals (a company that’s run amok coming under increasing scrutiny) and the very high valuation (nearly 50x trailing EPS). K12 reminds me of the subprime mortgage lenders and for-profit colleges when they were flying high – and the ending will be similar I believe.
Here’s the summary of why I’m short K12’s stock (page 8 of my presentation):
- · K12's aggressive student recruitment has led to dismal academic results by students and sky-high dropout rates, in some cases more than 50% annually
o I wouldn't be short K12 if it were carefully targeting students who were likely to benefit from its schools – typically those who have a high degree of self-motivation and strong parental commitment
§ But K12 is instead doing the opposite; numerous former employees say that K12 accepts any student and actually targets at-risk students, who are least likely to succeed at an online school
§ One former employee said: "K12's recruitment of inner-city and at-risk "last resort" students had another benefit – these students used up less of K12's educational and teaching resources while permitting K12 to collect full funding from the states."
o Like subprime lending and for-profit colleges, the business makes sense on a small scale but, fueled by lax regulation and easy government money, the sector has run amok
- · There have been so many regulatory issues and accusations of malfeasance that I'm convinced the problems are endemic
o Enrollment violations, uncertified teachers, conflicted relationships with nonprofit charter holders
- · I have been looking for years and have not found a single K12 school that is free of scandal and posting even decent (much less good) academic results
- · States (and the IRS) are waking up to what K12 is doing and the company is coming under increased scrutiny, which is beginning to impair K12's growth – and I believe this trend will accelerate
- · Yet the stock, trading at nearly 50x trailing earnings, is priced as if K12 will continue to grow at high rates for the foreseeable future and also improve on its persistently low margins and free cash flow
If you have had any dealings with K12, positive or negative, I’d love to hear about them!
2) The Congress was great and I’m already looking forward to the next one, which will be in Las Vegas on April 3-4, 2014 (with my Pre-Congress Workshop on April 2nd). We’re already confirmed a dozen fantastic speakers:
If you register by Friday (September 19th 2013) by clicking here and use this special discount code – VALK – it’s only $2,295, less than half the regular rate of $4,895 (the Workshop is heavily discounted as well: $1,595 until Friday).
Eric Sprott, Sprott Inc.
Zeke Ashton, Centaur Capital Partners
Carlo Cannell, Cannell Capital
David Hurwitz, SC Fundamental
Michael Kao, Akanthos Capital
Isaac Schwartz, Robitti & Company
Chan Lee, Petra Capital Management
Albert Yong, Petra Capital Management
Eric Andersen, Western Standard LLC
Whitney Tilson, Kase Capital
John Lewis, Osmium Partners
Lisa Rapuano, Lane Five Capital Management