A Hedge Funder Takes on Online Charter Schools

Over the last couple of weeks the opinions of investor Whitney Tilson on K12 Inc., and online schools writ large, have received quite a bit of attention. For those who are have not followed the story, Whitney Tilson is the founder and Managing Partner of Kase Capital Management who first called for shorting K12 Inc stock and shorted the stock himself, and then broadened his criticisms to say that online public charter schools in general are “a cancer” and should be closed. (Some of his comments are in his emails to subscribers, and I can’t find a record of all of them online, although some are here.)

I don’t know Tilson, although I understand that he is involved with Democrats for Education Reform among other education-focused non-profit organizations, and as such I suspect that he and I would agree on many issues. I also am told that he is well regarded within investment circles. But on the issue of whether all online charter schools should be shut down we don’t agree, and I believe he is wrong.

Tilson’s initial analysis, about whether K12 Inc. stock is overvalued, is an area that I do not know well. It appears grounded in financial data that is verifiable and publicly available, although it may be interpreted in multiple ways. However, it is abundantly clear that he stands to make millions of dollars if his predictions are accepted by investors and drive K12 Inc.’s stock price lower (see update #1 below). In other words, he has a vested financial interest in convincing people that his analysis about K12 Inc. is accurate. He doesn’t have to convince people over the long term, or more importantly, be correct. All he needs to do is convince enough people to sell K12 Inc. stock so that he price will go down, and he stands to make a large sum of money.

In a subsequent online debate with Jeanne Allen of the Center for Education Reform, Tilson states “I’ve openly disclosed my short position in K12 at every opportunity and made it clear that my funds and I will profit if K12′s stock goes down.” That is true, but it’s not clear that disclosure fully addresses the conflict of interest. It's not as if disclosure resolves the fact that he has a clear vested interest in driving the stock price down.

Further, although his initial analysis was based on publicly available information, his follow-up writings were not. Tilson discussed how he has heard privately from all sorts of putative K12 Inc. insiders—teachers, parents, former school leaders—who agreed with his claims. In fact, he seems to be implying, things are even worse than he thought. With this argument, he moved from a set of publicly verifiable facts to a set of private, powerful, and non-verifiable anecdotes, which happen to coincide with his analysis. Finally, he moved on to writing that the problem isn’t just K12 Inc., but that all privately run 100% online public charter schools are inherently flawed and should be closed. In doing so, he gets even further away from his original analysis about K12 Inc.’s finances, and away from a defensible position.

My views on all this:

  • I have no disagreement with his original presentation about reasons to be bearish on K12 Inc., which was based on public data and verifiable information. In some areas I disagree with his findings, but they are within the realm of reason.
  • However, when he then attempted to support his case with unverifiable anecdotes, his argument was substantially weakened. It is, at best, questionable (and at worst, intentionally deceptive) that all the anecdotes he provides strengthen his case and stand to make him millions of dollars.
  • Further, when he stated that he now believes that all solely online charter schools should be shut down, I lost all confidence in his objectivity. As he states himself, we know that many online schools are valuable because they provide the right fit for many students. Also, we know that most of the state data systems don’t provide accurate information about the performance of these schools because they don’t measure student growth based on individual student scores (they often use data on student cohorts). I am led to wonder if he is trying to provide cover for what may have been his original goal: to drive down the K12 Inc. stock price.

Update #1: I originally wrote this post several days ago, and since the time that I wrote it but didn’t have a chance to post it, Tilson appears to have been successful (or prescient), as K12 stock has dropped and is nearing its 52 week low.

Update #2: Some people who are unfamiliar with the stock market suggested that one person couldn’t have much effect on a stock price. For anyone who believes that I suggest this New York Times article, which details the effects of a major investor’s tweets on Apple’s stock.

Finally, after any post like this it’s important that I reiterate Evergreen’s relationship with the companies that are affected by this issue. K12 Inc. is not an Evergreen client or a Keeping Pace sponsor, although I have spoken at some K12 events (with travel reimbursed, but no speaking fee). Connections Education and Pearson are both Keeping Pace sponsors, and Connections is also an Evergreen client. Keeping Pace sponsors are about 50% public organizations and 50% private, and less then 50% for-profit. Evergreen clients are largely public or non-profit.