Thursday, November 20, 2014

What Went Wrong at the Upstart School Milken Backed?

Here's an in-depth Bloomberg article about what went wrong at for-profit online charter school company, K12, in which I'm quoted:

At a September 2013 investment conference, hedge-fund manager Whitney Tilson cited K12's recruitment methods as one reason why he was shorting its stock, along with weak test results and high student turnover. In a short sale, investors sell borrowed shares, and profit when a stock falls by buying cheaper shares that are returned to the lender.

Three weeks later, shares fell 38 percent in one day because of an announcement about weaker enrollment. Tilson, the managing partner of New York hedge fund Case Capital Management, said one of his funds made $500,000 from the decline in K12 shares.

As a former board member of the National Alliance for Public Charter Schools, Tilson is an unlikely opponent of K12, he said.

"I'm not against charter schools, I'm not against for-profits, I'm not against online," he said in an interview. "I'm just against all of those things run amok."

In a statement, the company said most of Tilson's analysis was "incorrect or tainted" because he "economically benefited from a negative report."

It's ironic that the company says the analysis I presented at my Value Investing Congress 14 months ago on Sept. 17, 2013 (you can see my 133-slide presentation was "incorrect" when, in fact, pretty much everything I said would happen did happen (or is happening), and as a result the stock has collapsed by 2/3, as this stock chart shows:
My investment thesis has largely played out (and I have, unrelated to this particular investment, significantly reduced my short book), so I am no longer short K12's stock, but I am still following the company closely and will continue to highlight bad things I think the company is doing (and, if warranted, praise good things it's doing). Speaking of which, one of the reasons I think K12's enrollment, margins and growth expectations are down (which is why the stock collapsed) is because the company has taken steps to rein in uncontrolled growth and invest more in providing a better education for students. Very small steps, to be sure, but at least ones in the right direction…

What Went Wrong at the Upstart School Milken Backed? 

By John Hechinger, Bloomberg
Nov 14, 2014 5:00 AM ET

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