By David Randall
NEW YORK, May 3 (Reuters) - Educational technology company 2U Inc could be poised for a comeback, a little more than six months after a report from noted short-seller Citron Research sliced its share price nearly in half.
Prominent fund companies William Blair, Franklin Templeton and Fidelity Investments increased their positions by 10 percent or more in their most recent quarters, according to Morningstar. That occurred when the total number of funds owning shares in the company, which markets and operates online graduate education programs for higher-tier universities such as Northwestern University, the University of Southern California and the University of California Berkeley, dipped 14 percent to 158.
The Meridian Growth Legacy fund - one of the best-performing small-cap funds over the last 10 years - added a new position in 2U over the same time.
With 2U set to report earnings on May 5, some fund managers say its quarterly results could counter any lingering suspicions and help it regain its all-time high of $39.45 within the next 12 months, a 42 percent jump from its close on Monday at $27.73.
"When you have a business that isn't profitable and growing fast, you can always poke holes in it, but we think that this company has such a strong tailwind. They are far and away the leader on execution and strategy" compared with education technology competitors, said Mike Balkin, portfolio manager of the William Blair Small Cap Growth fund.
Balkin estimates that 2U will have a $5 billion market cap within 3 to 5 years, a nearly three-fold increase from its current market value of $1.3 billion.
Fidelity, Franklin Templeton and Meridian declined to comment or did not respond to questions from Reuters.
Shares of the company dived in October after Citron Research called it "for-profit education in a silly disguise" and said its shares were worth $14, less than half the $29.22 they closed at the day before the report was published.
Citron did not respond to requests to comment, and 2U declined to comment, citing its upcoming earnings release.
Jeffrey Silber, an analyst at BMO Capital Markets, said the Citron report prompted the company to become more transparent about the profitability of its partnerships, countering Citron's claim that its older contracts were not making money. The company, which has said it is targeting 30 percent annual revenue growth for the next several years, is expected to announce six new programs in 2016, nine in 2017, and 12 in 2018.
Yet many investors remain skeptical. Short interest - a measure of shares being held by investors who are betting they will fall - remains high at 22 percent of available shares.
The high level of shorts could prompt the stock to pop should the company beat earnings estimates on Thursday, said Michael Tarkan, an analyst at Compass Point.
"As long as management continues to execute, you will see another level of short-covering as we move through the year," he said.
(Reporting by David Randall; Editing by Linda Stern and Dan Grebler)