Saturday, August 29, 2009

K12 Could Become a Shortseller's Nightmare

I've thought that internet learning was destined to be a significant component of educational spending since 2000. That was the year that K12 was founded. That was also the year that I put money into a private placement of equity. The companies are very similiar as they deliver distance learning content over the internet, except that limits itself to grades 9-12. The similarity also departs in revenue production as K12 generates sales of $32oMM while is much smaller. After long gestation periods, both started making money several years ago.

In addition to my stake in the private company, I've put together a position in K12 as well. Like many stocks, it has made a nice recovery from its lows. I think it will continue to do well as it is in the sweetspot of education. It can save school boards brick and mortar expenses, enhance charter school curriculum, and remains popular with home schoolers. It works for remedial as well as advanced placement. Since a teacher is involved, even the teachers unions aren't adamant about killing the process.

With tight school budgets, shortsellers identified LRN as a candidate for decreased funding and resultant revenues. That hasn't happened, but the short interest is still present. And what a presence-it's huge! At mid month, there were over 7.5M shares borrowed and sold short. That is 39% of the float. At present volume levels it would take 63 days to cover those shorts. Take a look at the following table:

K12 Inc ( LRN) Short Interest

Settlement DateShort InterestAvg Daily Share VolumeDays To Cover

Shares short has remained high while volume has lessened. Does that mean that everyone is on vacation? That shares are getting difficult to borrow? That shortsellers are biding their time until after the company reports quarterly results on September 9th?

LRN's price has been creeping up which will cause one of two possibilities to happen. Either sellers will renew their attack on the company and be willing to borrow even a greater percentage of the float or decide that revenue isn't crashing and make a move for the exit. If the latter happens, with 63 days to cover, a significant squeeze could occur and the share price could move nicely higher. Would it stay high? It could as a squeeze would attrack notoriety and momentum investors, plus K12 is still growing, a rarity today, and in an insulated space.

I'm keeping my position and hope that I see some nervous shortsellers in the next couple of weeks.

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