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 Class.com equity. The companies are very similiar as they deliver distance learning content over the internet, except that Class.com limits itself to grades 9-12. The similarity also departs in revenue production as K12 generates sales of $32oMM while Class.com 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

LRN K12 IncNYSE Settlement Date Short Interest Avg Daily Share Volume Days To Cover 8/14/2009 7,475,753 118,512 63.080135 7/31/2009 7,482,091 150,145 49.832435 7/15/2009 7,571,249 271,850 27.850833 6/30/2009 6,986,742 628,145 11.122817 6/15/2009 6,619,042 199,696 33.145591 5/29/2009 6,503,427 208,614 31.174451 5/15/2009 6,365,058 316,718 20.096925 4/30/2009 6,225,823 190,804 32.629416 4/15/2009 6,034,347 234,290 25.755888 3/31/2009 5,637,529 314,036 17.951856 3/13/2009 5,073,388 283,731 17.880979 2/27/2009 4,412,162 202,359 21.803636 2/13/2009 4,121,379 197,533 20.864256 1/30/2009 3,936,154 233,823 16.833904 1/15/2009 3,377,937 256,939 13.146844 12/31/2008 3,324,043 194,866 17.058096 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.

Barron's Is Wrong on K-12

Barron's recently had an article describing five short opportunities. Among them was K-12. The premise was that state education budgets will be cut and the impact on K-12 will be severe. I disagree.

I wouldn't risk shorting at this time. While LRN may decline with the general market pull back, the company itself is sound and in the sweetspot of education. Internet education, K thru 12, is on a huge uptrend. Ed budgets for virtual learning are being spared since they are a cost saver for school districts. Even the teachers unions aren't 100% against them as K12 uses unionized teachers in their instruction-just not as many per student load. Yes, the P/E is high, but so is their earnings growth as they have only reached profitability a few years ago. To use an overused term, their product is highly scaleable and the P/E will shrink as earnings grow. The company is worth holding long term and could see a huge pop, as it did about 2 weeks ago with a $7 move, if negative betters try to move to the door en masse.