Shame of a Nation

As a former educator who spent more than five years teaching in urban Washington, D.C., I get especially worked up when it comes to education and investing. It's no secret that our education system is one that leaves much to be desired, especially for students who need it most. The role that for-profit institutions should play in improving our system has been a hot topic.

While I haven't been shy about my distaste for for-profit universities writ large, I've also acknowledged that for some students, such schools make sense.

Before today, though, I'd never paid too much attention to K12 (NYS: LRN) an online for-profit business that operates public charter schools in several states. However, today's New York Times article brought the company front-and-center ... literally.

After reading the piece, I'm left wondering who deserves more ire, K12 for some of its structural deficiencies, or the New York Times, for its myopic and misleading use of facts.

Exhibit A: Questionable journalism
The author, Stephanie Saul, shows that, in most cases, students attending K12's subsidiaries score significantly lower than state averages on standardized tests. She then uses this information to jump to the conclusion that this is irrefutable proof that the schools are failures.

Her sobering conclusion actually leads the story off: "By almost every educational measure, the Agora Cyber Charter School [which K12 operates] is failing. Nearly 60 percent of its students are behind grade level in math. Nearly 50 percent trail in reading."

Though there are several valid points the author raises later in the piece (which I will discuss below), it's clear that test scores are the crux of her argument.

Sadly, the conclusions she draws from these scores are misleading and uninformed at best.

If this were a real statistical analysis -- truly showing that K12 wasn't adding educational value -- there would have been an analysis by cohorts: groups of kids entering the same grade at the same time. This would offer a far more accurate and contextual picture of K12's performance.

For our purposes, let's hypothetically say that 20% of incoming fifth-graders in 2008 tested proficient in math or reading. By following that cohort, we may see that two years later, 50% are now testing as at-least proficient.

If my hypothetical situation were true, the Times could still write: "Fifty percent of students are below proficiency, and the schools are, therefore, failures." But in truth, the school would be doing an excellent job, as it is accelerating the average student's pace of learning to the point where he/she could be on par with his/her peers.

This isn't to say that K12 does, in fact, do a great job. I'm simply saying that the author produced no real evidence to prove that it was doing a bad job as far as test scores go.

Exhibit B: A questionable model for education
But it was the supporting evidence Saul offered that I actually considered to be more damning than test scores. Specifically, there were three broad areas that I found particularly alarming about the K12 experience.

1.Recruitment practices: One of the key complaints Saul cites from employees: "Problems begin with intense recruitment efforts that fail to filter out students who are not suited for the program." Such misalignment of incentives -- where students and their parents are looking for a good educational fit while recruiters are simply looking for more students -- is a recipe for disaster. It's exactly what got Apollo (NAS: APOL) , Corinthian (NAS: COCO) , the Washington Post (NYS: WPO) and Education Management (NAS: EDMC) in big trouble with the Government Accountability Office this summer.

2.Heavy teacher loads: Though K12 receives less money per student than typical public schools, it also has far less overhead in the form of an actual bricks-and-mortar school building. It's hard to understand, then, why some teachers report student loads in excess of 250 students. Either (1) this model isn't scalable to support such numbers or (2) there is gross negligence on behalf of the management entrusted with providing the requisite number of teachers.

3.A broken model: But the most troubling aspect of the school is its lack of accurate quality controls. This goes from the attendance policy to its grading system. "A new grading policy states that students who do not turn in work will be given a '50' rather than a zero." This screams of social promotion, and unlike in regular public schools, this is social promotion with a profit motive -- a very dangerous place for a school to be in the court of public opinion.

Where does this leave us?
K12 no doubt provides a service that is valuable and helpful to some students. But in its pursuit of profits, it is luring people -- children and their parents -- into its system that simply won't/don't benefit.

There are limits to growth in the industry -- online schools aren't for everyone. School operators, however, have no problem trying to plow right through those limits. A final death blow to the stock could come in the form of real statistical analysis from the Times. Until then, evaluating the quality of the school will be far more difficult.

To see if any damning or supporting analysis comes out regarding these institutions, I encourage you to add them to My Watchlist, a totally free service by The Motley Fool to bring you relevant news and analysis about the companies you care about. You can click the links below to start today.

At the time thisarticle was published Fool contributor Brian Stoffel does not hold a position -- long or short -- in any of the companies mentioned. You can follow him on Twitter at @TMFStoffel. Motley Fool newsletter services have recommended buying shares of K12. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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