Whitney Tilson has some new interesting details about K12 Inc. (NYSE:LRN) below. (see his ‘first’ article on topic here) (a stock which Tilson is short). Whitney Tilson has been very critical of the company see ‘Criticism Isn’t Stopping me’ and Tilson on K12 ‘My response to Dear Whitney – Are we having fun yet?’). Also see more from Tilson on the company here and here.
Below is the latest from Whitney Tilson
1) Forrest Gump: My momma always said, “Life was like a box of chocolates. You never know what you’re gonna get.”
That line came to mind as I was thinking about the wild turn of events the last few days vis-à-vis K12 Inc. (NYSE:LRN). The stock is down 37% today and has been cut in half since I went public with my concerns about the company (and my funds’ short position) three weeks ago (the latest version of my presentation is posted here).
But let me start the story two days ago: on Monday night, I went to a dinner hosted Mayor Bloomberg at Gracie Mansion for folks attending the Education Nation conference that was going on earlier this week in NYC. It was a great event with lots of my friends there, including Jeanne Allen of the Center for Education Reform – the first time I’d seen her since our back and forth early last week. We had a nice chat and even got our picture taken (with Eva Moskowitz, founder and CEO of the Success Charter Network) in case anyone thinks there are any hard feelings between us:
And then she said, “You know Ron Packard [the founder and CEO of K12] is here. Let me introduce you.” In light of what I’ve said and written very publicly about him and his company in the last three weeks, I feared an ugly confrontation so I demurred.
Jeanne is very persistent, however, so not long afterward, as I was talking to some other friends, she came over with Ron and introduced us. We shook hands and he said he’d read my presentation and thought I got some things wrong. I said I’d love to hear what and we started talking. And talking and talking… Somebody gave a speech – and we kept talking. Then some performers sang – and we moved to the side of the tent and kept talking. The party ended, everyone left, the crew folded up all the tables, and the clock struck midnight (3 ½ hours later) – and we kept talking. We figured they were going to kick us out, so we left and walked a few blocks up to the corner of 88th and Lex – and kept talking. Finally, at about 12:45am, my worried wife called me and said, “Where are you?!” I said, “You’re never going to believe who I’m standing here talking to…” So after 4 ½ hours, we both hopped into cabs and went our respective ways.
Whitney Tilson on shorting stocks
I have been shorting stocks for over a decade and have gone public with my short thesis on a handful of occasions and, as a result, have been sued, deposed, subpoenaed and investigated (there are good reasons why very few short sellers ever speak publicly) – but I can’t recall the CEO of a company I’m short being willing to engage in a lengthy, frank conversation like Ron and I had on Monday. (My only similar experience was when Reed Hastings published a response to my article in December 2010 in which I detailed why I was short Netflix, Inc. (NASDAQ:NFLX) at that time; after the stock collapsed, I went long it and still hold it – it’s been one of my best investments ever.)
I want to respect the privacy of our conversation, so I’m not going to detail what Ron said, but do want share some of my thoughts.
First, I liked Ron. I found him very personable, I think he honestly believed everything he said to me, he didn’t get angry or defensive when I pushed him on some pretty tough stuff I’ve heard and written about K12 Inc. (NYSE:LRN), and we have a lot in common: early in our careers, he was at McKinsey and I was at BCG; we’re both interested in stock picking (long and short); and of course we’re both passionate about improving and reforming education and the role technology can play. I think Ron is an incredible visionary and entrepreneur, and he’s built an important and innovative company. I now see that there’s a lot of good in K12.
Before I met Ron, I thought he and the other leaders of K12 Inc. (NYSE:LRN) were deliberately targeting and enrolling kids they knew were certain to fail in order to maximize their revenue, run their stock price up, and make a few more millions for themselves. I no longer believe this about Ron. I think he wants to do right by kids and that, if given the option of taking a student he knew wouldn’t be successful at a K12 school, but would be highly profitable for the company, he wouldn’t want that student. He believes – and I think he’s right – that there’s lots of room for the company to grow for a long time serving only students who will benefit from a K12 school.
So I don’t think there was ever a meeting at K12 Inc. (NYSE:LRN) in which the company decided to pursue maximum growth at any cost, even if it resulted in a lot of kids enrolling who were highly likely to fail and suffer a major educational setback. Yet even if it wasn’t intended, that’s exactly what I’m convinced is happening right now for a meaningful percentage of K12’s students (I’ve heard estimates as high as 85%, based on the very low number of K12 students who are demonstrating proficiency).
I think that a number years ago (coinciding, not coincidentally, with the company going public in late 2007), K12, in balancing its desire for growth vs. doing right by kids, let that balance get way out of whack.
I’ve seen it happen at countless companies – the board and management team get on a treadmill of scrambling to meet analyst expectations every quarter, they start to think (albeit perhaps subconsciously) that it’s their job to keep the stock price up, and they start doing all sorts of unnatural, short-term-oriented, unethical and, in the worst case, illegal things to keep the game going.
Fueling this is the genuine passion Ron and others at K12 Inc. (NYSE:LRN) have for online education. They have a missionary’s zeal