Whitney Tilson Wraps Up the Value Investing Congress

Markets
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After two days and more than 20 presentations, Value Investing Congress co-founder Whitney Tilson wrapped up the conference with a stock pick of his own.
Tilson’s pick is a bearish one. He wants to short sell…
K12 (NYSE: LRN)

  • Originally a student recruitment business that establishes and manages online charter schools, K12 has since “run amok”. The company is targeting students that are too at-risk, leading to dismal academic results.
  • The stock is currently trading at 49 times trailing earnings.
  • While revenue growth has been good, K12 doesn’t have many profits to show for it. EBITDA and net margins are also falling.
  • Free cash flow has been up and down over the last 10 years.
  • Former employees frequently talk about K12’s grow-at-any-cost mentality. When the company went public, its priorities seemed to shift from academics to growth. The company doesn’t appear to want to help kids.
  • K12 spends well less than half what normal schools do on teachers. Classroom sizes are way too large – as many as 300 kids in one classroom!
  • Student testing is not reliable since they are unsupervised with no protocol. Despite that, K12 is actively peddling its results to shareholders since its students’ results were mysteriously DOUBLE average national results.
  • 29 of K12’s 36 schools failed to achieve a state rating.
  • Higher dropout rates than most schools.
  • Graduation rates at K12 are less than 50% at K12, compared to the national rate of 79%.
  • “The entire business model is illegitimate,” Tilson says. K12 violates IRS rules by partnering with nonprofit schools and collecting all the profits in a way to circumvent 501(c)3 regulations of charter schools.
  • The company NEEDS to shrink, not grow, in order to survive. Colorado already did it with some success.
  • Growth is already slowing, and the stock will never warrant its PE of 50.
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