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K12's Troubles Mounting in the U.S.

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Shareholders in K12 (LRN) just can't seem to get a break.

At $23, the stock trades at over 70 times trailing earnings and thus is priced for absolute perfection. Lately, LRN has been delivering far more disappointments than this valuation will be able to tolerate. Judging from the stream of negative press and lawsuits against K12, it would seem that the company's troubles are just beginning.

In December, a scathing front page article in the New York Times sent the stock plunging by nearly 40% within days, with the share price ultimately hitting a new 52-week low of $17.07.

A series of lawsuits alleging securities fraud followed soon thereafter and are currently in process. January's strong markets helped to buoy LRN, with the stock recovering almost all of its December losses. However a disastrous set of fourth-quarter results sent the stock plunging as much as 20% in intraday. Once again the stock began a slow rebound. However, now LRN has become the subject of yet another critical article from , which looks likely to create a new set of pressures on LRN going forward.

That a caustic New York Times would have such an effect on LRN should come as no surprise as it is the daily morning paper for most of Wall Street. However what is interesting is that there has been a string of biting articles and reports from various local news sources which have gone virtually unnoticed.

In Hawaii, local news sources revealed that K12 had fired the head of its local school (The Hawaii Technology Academy) and that an independent audit had found that "abuse, waste or fraud" likely occurred.

In Iowa, LRN made an aggressive push to enter into the Iowa school systems. It has already contracted with a school district and begun signing up students. Unfortunately it came to light that the service that K12 offers (virtual online education at home) is prohibited under Iowa state law, which states that "telecommunications shall not be used by school districts as the exclusive means to provide any course which is required by the minimum educations standards for accreditation." In short, LRN contracted with the school districts but the school districts do not have the authority to sign such a contract. K12 had expected as many as 300 students to sign up by March 1, but reportedly has "fewer than 50 so far.
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