Class is in

  • As new school year looms, some digital ed stocks have hit records
  • Noted short-seller makes bull case for online educator
  • Pullbacks in other parabolic rallies offer possible lessons

To say the coronavirus caught the world off guard is an understatement, but few areas of life were disrupted as much as education.

As the lockdown swept the country and kids were sent home, K-12 schools scrambled to implement online teaching regimens that, for the most part, didn’t exist. And with a new school year looming, and tremendous uncertainty about what it will look like, digital education companies have found themselves attracting more attention from the education system—and the market.

Stocks of many companies providing online education services and support hurdled off their March lows, including Arco Platform (ARCE), Perdoceo (PRDO), Bright Horizons Family Solutions (BFAM), and (for China representation) New Oriental Education Group (EDU).

But two of the most notable names are Chegg (CHGG) and K12 (LRN), both of which have more than doubled since mid-March:

Chart 1: Chegg (CHGG) and K12 (LRN), 3/17/20–7/16/20. Chegg (CHGG) and K12 (LRN) price charts. Online ed stocks soared.

Source: Power E*TRADE

Both companies cater to the K-12 market (rather than post-secondary education), with CHGG focused more on support (textbook rentals, study aids, tutoring, etc.) and LRN in the business of delivering online (and hybrid) teaching programs to schools.

LRN’s explosive move the past three days came as research firm Citron Research—known mostly for its company takedowns and short-selling recommendations—issued a bullish report on the stock.1

And its stock price, which had lagged CHGG’s since May, pushed to the head of the class thanks to an incredibly strong July, which included a 41% gain this week through Thursday:

Chart 2: K12 (LRN), 2/27/20–7/16/20. K12 (LRN) price chart. Hyperbolic rally.

Source: Power E*TRADE

LRN’s options volume has been off the charts, too. Midday yesterday call volume was around 20 times its average level, while put volume was 50 times higher.

We’ve seen other moves like this the past few months, including in stocks that have been embraced because of their supposed “pandemic edge.” But corrections in other high-flying names highlight why experienced traders would likely look at moves like the one in LRN with a “two-way” mindset. Case in point: The sharp pullbacks in several high-profile electric vehicle makers, after many of them exploded to the upside in recent weeks.

Such moves are stomach-churners for investors who chased prices at or near all-time highs, but it probably paid off for some short sellers, and is also likely a welcome development for patient long-side traders interested in catching another potential upsurge closer to its beginning than its end.

Although shorting a parabolic rally is just as dangerous as trying to buy a free-falling stock, strategic bulls may be eyeing possible retracement levels in the event LRN gives back some ground before attempting to stage another rally.

The levels marked on the price chart—support at previous consolidations/breakout levels—may be likely suspects for some traders. Also, Fibonacci fans will notice they roughly coincide with the 38.2% and 61.8% retracement levels of the rally off the March low—if yesterday turns out to be an interim high, that is.

The way LRN and some other online ed stocks have been moving, that’s a big if—but one worth keeping in mind.

Today’s numbers (all times ET): Housing Starts (8:30 a.m.), Consumer Sentiment (10 a.m.).

Today’s earnings include: BlackRock (BLK), Kansas City Southern (KSU), NVR (NVR).


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1 Citron Research Positive Again on K12, Inc. (LRN), Highlighting Educator Gains. 7/15/20.

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