Why K12 Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of childhood educator K12 (NYSE: LRN  ) were getting sent to detention today, falling as much as 16% after Wells Fargo downgraded the stock from outperform to market perform.

So what: Wells Fargo analyst Trace Urdan said one of K12's programs, Colorado Virtual Academy, is underperforming, and its charter is under pressure. The academy requested to become a "quasi-state agency" to circumvent the funding issues, though that request appears likely to be denied. The school only contributes 3% of K12's margins, but these issues could be representative of greater problems in the company at large.

Now what: This isn't the first time K12's model has been attacked. A scathing report in The New York Times last year called into the question the efficacy of the company's programs which provide online classes to school-age children as a substitute for in-school learning. Shares traded near $30 before then and have never really recovered. With a P/E near 40, the stock is still priced for perfection and rapid growth, and any concerns that its service is below educational standards will understandably have investors running for the doors. I'd stay away until K12 proves that its business model and its schools are truly sustainable.

Don't miss K12's next report card. Add K12 to My Watchlist.


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