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Washington Post Shorts Triple as Paper Loses Kaplan Bulwark

Investor bets against the stock of the Washington Post Co. (WPO) have more than tripled over the past year, as the government investigated the for-profit education business and the company’s earnings dropped.

The Washington-based company, which owns the Washington Post newspaper and Kaplan education business, had short interest in its stock rise to 866,903 shares at the end of April, compared with 223,164 a year earlier, according data compiled by U.S. exchanges and Bloomberg. The figure is the highest since at least September 1991, the earliest data Bloomberg has.

The bearish bets reflect the rising challenges for Kaplan at the same time the Washington Post newspaper struggles with print advertising and circulation declines, said Mark Travis, chief executive officer of Intrepid Capital Management Inc.

“The shorts have been working over the for-profit education industry for a while and their newspaper business is obviously challenged,” said Travis, whose Jacksonville, Florida-based firm manages $1.4 billion and uses short-selling as an investment strategy, though it is not short Post Co. “It may look like a cheap security on its face, but it’s probably a dying business.”

Kaplan’s decline may put pressure on the company’s 134- year-old newspaper, which uncovered the Watergate scandal in the 1970s and has won 57 Pulitzer Prizes, according to the company. The paper is losing its inoculation against the downturn that has stricken other publishers, said analyst John Morton.

“The bulwark against financial distress is now under distress itself,” Silver Spring, Maryland-based Morton said in an interview. “Kaplan may be able to pull itself out of this, but it’s probably going to get worse for the newspaper.”

Kaplan Drop

Donald Graham, chief executive officer, wasn’t available for comment, according to company spokeswoman Rima Calderon.

While the Post paper has had layoffs, Kaplan helped protect it from the worst of the industry’s troubles. Newspapers from the Philadelphia Inquirer to the Chicago Tribune to the Denver Post have filed for bankruptcy in the past three years.

At the company’s annual meeting yesterday, Graham said the paper did well financially last year, when it cut expenses and closed two printing plants.

“What it doesn’t mean is that future years will necessarily be as good,” Graham said, according to a transcript of his speech. “2011 shapes up as a very challenging year at the newspaper, but I expect every future year to shape up as a very challenging year at the newspaper.”

The company’s newspaper division, which also includes the Herald of Everett, Washington, had a first-quarter operating loss of $12.8 million, compared with the year-earlier loss of $13.8 million.

State, Federal Investigations

Washington Post Co. fell $9.66, or 2.3 percent, to $416.52 at 4 p.m. in New York Stock Exchange composite trading. The shares have declined 5.2 percent this year.

The company faces a challenge in keeping tight control over newspaper expenses. The union representing newsroom and other employees said last week it wants a 16.4 percent pay raise, the same level publisher Katharine Weymouth received, as it negotiates a contract to replace one that expires in June.

Kaplan, which offers degree programs online and on campuses as well as test-preparation courses, saw enrollments at Kaplan University and Kaplan Higher Education decline 23 percent in the first quarter, contributing to a 67 percent drop in Post Co.’s net income. The company said it expects Kaplan’s profit to decline “very substantially” this year.

Kaplan is facing increased regulations as for-profit colleges come under state and federal investigations. The U.S. Department of Education is proposing new rules regulating the federal aid that many Kaplan students have used to pay for their tuition.

Buffett, Gates

The new rules come after the U.S. Government Accountability Office found that recruiters at for-profit colleges have been enrolling unqualified students and leaving them with loans that they are unable to repay. Kaplan accounted for 60 percent of Post Co.’s revenue in the first quarter.

Warren Buffett, whose Berkshire Hathaway Inc. (BRK/A) is the company’s largest shareholder, and Melinda Gates, who runs the Bill & Melinda Gates Foundation with her husband, Microsoft Corp. (MSFT)’s co-founder, have left the company’s board.

In a short sale, a trader borrows shares and sells them. If the price drops, the trader profits by buying back the stock at a lower price, repaying the loan and pocketing the difference.

Bearish wagers against Post Co. rose to 14 percent of shares outstanding at the beginning of May, the most since at least July 2006, according to Data Explorers, a London-based research firm that surveys financial institutions to garner more recent short data than that available from exchanges.

“Given that the average short interest is about 2 percent, this is a noteworthy level,” said Will Duff Gordon, the firm’s research director.

The stock is becoming more difficult to borrow, with 59 percent of the lendable supply out on loan, up from 11 percent a year ago, according to Data Explorers.

“This may be some of the same investors doubling their bets,” said Gordon.

To contact the reporter on this story: Brett Pulley in New York at bpulley@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom in New York at pelstrom@bloomberg.net.

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