Whitney Tilson at VIC Presents His Big Short

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Whitney Tilson is the founder of value oriented hedge fund Kase Capital, as well as the Chairman Emeritus, Value Investing Congress. Tilson is giving a presentation titled “My Current Thoughts on Stocks and Markets” live from the 9th Annual Value Investing Congress in New York.

Whitney Tilson

Whitney Tilson is the Founder and a Managing Partner of Kase Capital, which manages three value-oriented hedge funds. He is the co-founder of Value Investor Insight, a famous value oriented newsletter. Whitney Tilson has co-authored More Mortgage Meltdown: 6 Ways to Profit in These Bad Times and the just-released The Art of Value Investing: How the World’s Best Investors Beat the Market , and was a contributor to Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger.

Whitney Tilson is going to unveil his biggest (and best) short idea.

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Whitney Tilson live coverage

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[3:50pm] Tilson presenting 82-slide short position on K12, Inc. (NYSE:LRN). Noted this chart looks a lot like the rest of his short book (followed by laughter).

K12 is a for-profit online education company. Ran through the bull case which centered on a long runway for growth (compound revenue growth has been strong since company founding in 2000).

Short thesis: LRN employs aggressive student recruitment which has led to poor academic results and high dropout rates. Increased regulatory scrutiny could begin to hinder K12’s growth prospects.

Tilson is highly plugged into the education movement around the US and getting data points that support his short thesis.

Financials all look pretty good, which is the bull case…..

K12 aggressively capitallizes large costs

trailing P/E =49x

EV/EBITDA: 14.3x

Tilson has interviewed many K12 employees and former employees

(4:00pm EST)  Says former employee of ohio schools became disappointed after IPO because company was not focused on academics anymore and just focused on admission numbers so they can keep their large multiple.  Says it is a house of card.  Sales team is like a boiler room, spouting off false information and lying.  Intentionally targeting at risk kids now

Former employees are currently filing a class action law suit

Each slide literally is equivalent to a novel…..very tough to take notes and keep up

Just keeps reiterating how many employees and former teachers he has spoken too

Tilson now showing how their academic results are terrible and K12 claims they just have more at risk kids.

All tests are take home, so claiming kids are just cheating….

There is absolutely no learning going on.  The Tennessee virtual school actually makes kids dumber by the time they leave according to his chart!

Sky high drop out rates…at least 40% churn rate!!

Just quoted Roddy Boyd on K12…I wonder where he got the idea…..

K12’s relationship with nonprofit charter holders is rife with conflicts and self dealing and may violate IRS and State regulations…the IRS is scrutinizing this currently.

(4:20pm EST)  They spend a lot of money on Lobbying,which is why Tilson says they are staying afloat

Tennessee is looking to shut down the online schools of K12 due to terrible results…enrollment is now down by 2/3rds

Massachusetts blocked a new virtual school from going up

Florida has been using uncertified teachers with huge classroom sizes

Difficulties in Colorado

Been denied opening a new school in several states

Forward EV/EBITDA does not look outrageous (note taker comment), but Tilson is solely focused on the P/E Ratio

Tilson’s main point is that they are not going to grow and in fact they need to shrink

Growth has already been slowing…enrollment data is weak, analysts are factoring in rising margins and growth



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