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K12, Inc. attracts Wall Street criticism, compared to subprime mortgages

I wrote yesterday about the renewed attempts to open a virtual charter school in North Carolina run by K12, Inc., an online education company that’s faced fierce criticism for the quality of public education it delivers (Click here to read.)

A reader alerted me to a September presentation New York hedge fund manager  Whitney Tilson made at an investment conference where he  gave a harsh recap of K12’s business model, saying that the company pulls in students not well-suited for online learning in its pursuit of increased revenue from public coffers.

K12,Inc. (NYSE:LRN) earned $848 million in revenue for the 2013 fiscal year, 86 percent of it from its business running virtual public schools in 33 different states., according to its 2013 annual report.

Tilson doesn’t hold back much in his criticism.

“K12 reminds me of the subprime mortgage lenders and for-profit colleges when they were flying high – and the ending will be similar I believe,” Tilson wrote in an email to Business Insider, who posted his entire slide presentation here.

Tilson, also an outspoken education reform proponent who previously served on the National Alliance of Public Charter Schools board, “shorted”  K12’s stock in the presentation, meaning he predicts that the company’s value will go down.

He made his decision because of what Tilson describes as K12’s aggressive pursuit of students unsuitedto the home-based online schooling that led to poor academic results. He also expressed concern about numerous regulatory issues and accusations of wrongdoing K12 has faced that Tilson wrote, “I’m convinced the problems are endemic.”

K12, for its part, has defended its low test and graduation rates in many states, pointing out the schools they run tend to attract large numbers of at-risk students.

He highlights the Tennessee Virtual Academy, which opened in 2011 and is “the worst of any school in the state,” according to Tilson.

The school had test scores in its first year of operation that put it in the bottom 11 percent of Tennessee schools, according to 2011-12 school data.

“I think it’s safe to say there’s almost no learning at all going on at TVA,” Tilson writes on a slide showing the school’s low test scores.

TVA

Slide from Tilson’s presentation on TVA. Source: Business Insider

To read Tilson’s slideshow, which is chock-full of charts, data and interviews from named and unnamed former K12 employees, click here.

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K12, Inc. attracts Wall Street criticism, compared to subprime mortgages