A Stock to Learn About: K12 Inc. (LRN)

"Stocks Under Rocks" is designed to introduce you to some lightly-traded equities that may not attract much attention or press but that could be poised for gains in the short or intermediate term.

Just the Facts

K12 is in the business of education. But unlike higher-profile names like Apollo Group (APOL), K12 caters to the younger sect, as its name would suggest. The technology-based firm develops curriculum, software, and other educational services for student and schools in kindergarten through 12th grade.

In recent news, the sole lawsuit against the company came to a close – in the company’s favor – on June 12. A Chicago-area Circuit Court dismissed charges filed by the Chicago Teachers Union claiming the charter for Chicago Virtual Charter School, an institution powered by K12 curriculum, was unlawful. This ruling spurred a sigh of relief for K12 shareholders, who may have been worried that other teachers unions would follow suit had the litigation been successful.

In its last trip to the earnings confessional, LRN reported per-share results of 12 cents per share, topping analysts’ estimates by a penny and easing past the prior year’s results by 33%. According to company comments, growth is projected to be in excess of 25% over the next three years and by more than 35% in the next five years. This growth is expected to be fueled by efforts to boost enrollment and plans to expand to more states.

Talking Technicals

LRN is currently trading near the middle of its 52-week range bounded by 11.95 at the low end and 29.47 at the high. Since March 9, the shares have risen nearly 50% but have given back 8% today, providing a potentially attractive entry point. The stock is perched above the 18 mark, which is not only the site of technical support going back to late 2008, but it is currently home to LRN’s 10-week moving average.

Volatility Outlook

LRN is not a terribly liquid stock; average daily volume is about 360,000 and the float is just 20 million. Additionally, 32% of the stock’s float is sold short and LRN boasts a short-interest ratio of 40 days to cover. This means potential short-covering activity around earnings-reporting time and large jumps in the stock on any news. LRN may require a strong stomach (or a long-term horizon), but it could pay off well down the road, much like a high-school diploma.