Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 588

Fending off short sellers and gaining conviction in a stock

In January 2021 vaccines were rolling out, people were starting to travel again, and the share market had flipped back from ‘stay at home’ stocks to the ‘re-opening trade’. That was when we attended the Needham Growth Conference in New York and found one of our best stocks of the last few years.

The Needham Conference is one of the biggest small-cap investment conferences. Fund managers were lining up to meet the management of companies primed to capitalise on the tidal wave of services spending as consumers emerged from hibernation.

So, what did we do?

We asked the conference organisers: “What are the companies at the conference with the least requested number of meetings by fundies?”

The company that no one wanted to see was Stride (NYSE:LRN). Stride provides online education solutions to kindergarten through Year 12 students in the U.S. and their solutions are used in the classroom. But originally and still, they are used by students homeschooled for various reasons including bullying, parental preferences; even for child actors.

When we were all going to ‘work from home’ during COVID, students were going to ‘learn from home’. Stride’s share price rocketed from around US$20 to over US$50 between March and August 2020 as demand, and expectations of demand, for their products and services ballooned.

But by January 2021, the time of the Needham Conference, the balloon had popped. As students returned to school, investors thought there’d be no durable increase in demand, so Stride’s share price returned to US$20. In any case, fundies had turned their attention elsewhere.

What we found when we decided to dance with the ‘wallflower’ Stride

Stride was the proverbial ‘wallflower’ at the prom. But we decided to dance with Stride and we found:

  • A company structurally benefitting from increasing adoption of virtual schooling more generally (despite schools having been reopened), which could lead to sustained growth in a market in which Stride was a leader.
  • Defensive revenue growth of 8-10%, underpinned by state government budgets that fund the 70 schools across 35 US states in which Stride had solutions.
  • High incremental profit margins, driving what we expected would be 20%+ earnings growth.
  • A depressed EV/EBITDA (Enterprise Value to Earnings Before Interest Tax Depreciation and Amortisation) valuation multiple of just 5x.

Of course, we never just take what the company says at face value, so we got to work. We checked data around individual schools' login traffic; called enrolment centres for intel, including the number of open enrolment applications; spoke to public and private school peers around market share changes; and spoke with school district budget allocators to ensure the funding was rock solid.

We initially bought Stride in January 2021 between US$22-25. We have held ever since, building our conviction and knowledge around the business. And boy, has it delivered. From financial year 2020 through to 2024 it has:

  1. Doubled revenue from US$1.04 billion to US$2.04 billion
  2. Improved EBITDA margins from 11% to over 18%
  3. 10x’ed profit from US$24.5 million to US$240 million (12 months to Sept 2024)

Fuzzy Panda tests our conviction

But then, last month, our conviction was really tested.

Fuzzy Panda (FP) – no not a Sesame Street character, but a well-known short-selling organisation – released a report on the 16th of October dubbing Stride “the last COVID over earner”.

The stock tanked by over 9% on the day but Stride was down -24% if you include the falls leading up to the report, when FP was clearly putting on their short position.

FP was essentially claiming that Stride was a big beneficiary of the US$190 billion in Federal emergency relief funding program for U.S. schools during COVID. The funding was ending in September 2024 and FP warned Stride’s profits were about to “fall off a COVID cliff”.

Australian investors in ASX-listed companies probably aren’t that used to ‘short reports’ as they’re not that prevalent domestically. However, they are big business in the U.S. and par for the course if you’ve been investing there long enough. The playbook is simple.

Take a short position, put out a scary report questioning the company’s profits, and many investors will dump the stock (regardless of the merits of the short report).  The shorter then closes the short by buying back the stock at the now lower price, pocketing a tidy profit. Sometimes there is merit to the short report, sometimes it’s just hot air.

Over the three years we have owned the stock, we have spoken with Stride’s management on multiple occasions each quarter. We have found them diligent, trustworthy and conservative.

But we also did more work.

We already knew from the publicly available individual school budgets that the federal COVID funding was used to offset funding from the states during COVID. But we also went through the corresponding state budgets in detail. These showed that the states were increasing their education spend to offset the federal grant funding that was ceasing. 

This gave us comfort there was no big looming funding shortfall from state schools for Stride’s offering. And it gave us the conviction to hold through the short report.

When Stride reported its September quarter results aftermarket on the 22nd of October, it blew the market’s expectations away. Both at a revenue and profit level. The next trading day the stock popped around +40%!


Source: Ophir & Bloomberg. Data as of 31 October 2024.

The future of Stride

So where to next for Stride?

Even though they are the largest online education provider in the U.S. by enrolment, they are still very underpenetrated across schools. They can also fuel growth by entering or expanding into education verticals including:

  1. Experiential learning: Through extended, augmented and virtual reality modes; AI voice and chat learning software; and games and simulation teaching solutions.
  2. Learning support: Building out their tutoring business which we think could add 30-40%+ to today’s earnings over the medium to longer term, given their existing relationships with students and teachers.
  3. Workforce and talent development and acquisition: Providing certifications to the increasing number of U.S. high school leavers who are shunning four-year college degrees and opting instead to directly enter jobs. Stride already owns a business called Tallo, which connects students from Stride-powered schools to opportunities (the Tallo app has 1.7million users already!).

A long career ahead

Today, Stride is still growing earnings at 20%+. That’s two to three times the market’s growth. Yet it operates in a defensive end market with a large share of its revenues underpinned by state government education budgets. It’s a great all-weather stock.

But its valuation is lower than the market. Stride trades on a still cheap 13x price to earnings ratio. Most of the share price move since we have owned it has actually been driven by earnings growth and not valuation expansion. We think it could still be a 20x P/E business.

So while it’s been a great performer for our Funds, we still think there is a long ‘career’ ahead for Stride.

…the hard work pays off

It would have been easy to crack during the Fuzzy Panda shorting drama and sell Stride.

The only way to know whether to ‘keep the faith’ or to ‘fold’ is to put in the work and back yourself. It won’t always work out on your side, but if you go the extra mile, it will more often than not.

We are proud of the team and the work they have done which allowed us to keep our conviction in Stride.

We’re also glad we took that meeting that no one else wanted back in 2021!

 

Andrew Mitchell and Steven Ng are co-founders and Senior Portfolio Managers at Ophir Asset Management, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

Read more articles and papers from Ophir here.

 

  •   27 November 2024
  • 1
  •      
  •   
banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Latest Updates

Shares

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Superannuation

When you can withdraw your super

You can’t freely withdraw your super before 65. You need to meet certain legal conditions tied to your age, whether you’ve retired, or if you're using a transition to retirement option. 

Retirement

A national guide to concession entitlements

Navigating retirement concessions is unnecessarily complex. This outlines a new project to help older Australians find what they’re entitled to - quickly, clearly, and with less stress. 

Property

The psychology of REIT investing

Market shocks and rallies test every investor’s resolve. This explores practical strategies to stay grounded - resisting panic in downturns and FOMO in booms - while focusing on long-term returns. 

Fixed interest

Bonds are copping a bad rap

Bonds have had a tough few years and many investors are turning to other assets to diversify their portfolios. However, bonds can still play a valuable role as a source of income and risk mitigation.

Strategy

Is it time to fire the consultants?

The NSW government is cutting the use of consultants. Universities have also been criticized for relying on consultants as cover for restructuring plans. But are consultants really the problem they're made out to be?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.