Why Chinese Education Stocks Bounced Back Today

What happened

“Buy the rumor, sell the news” goes the old investing maxim, advising investors to buy stocks before they announce anticipated good news and then cash in when the news comes out. But…what do you do when the anticipated news is bad instead of good?

Well, it seems the answer today is to sell on the rumor of impending disaster and then buy back when the rumor proves true — and that’s how investors are reacting to confirmation of China’s crackdown on for-profit education companies, as shares of

  • Gaotu Techedu (NYSE:GOTU) rose 4.6%;
  • New Oriental Education(NYSE:EDU) jumped 5.5%;
  • TAL Education (NYSE:TAL) went up 6%;
  • and 17 Education & Technology Group (NASDAQ:YQ) outpaced them all, exploding 22.1% higher.
Chinese dragon superimposed on a stock chart

Image source: Getty Images.

So what

This might not be the reaction you were expecting to today’s news from Wall Street, where investment bank Daiwa downgraded shares of both New Oriental Education and TAL Education to “hold” today and Deutsche Bank did the same to New Oriental, TAL, and Gaotu Techedu.

As Deutsche explains in a note covered by TheFly.com, the Chinese State Council has just published its “Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education,” and the news is actually even worse than feared. After-school tutoring institutions such as Gaotu, New Oriental, TAL, and 17 Education must now transform themselves into “nonprofit organizations,” with the aim of lowering the cost of education for students and their parents (and, incidentally, making it easier for them to contemplate having more kids, thus replenishing China’s shrinking population).

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Now what

New Oriental Education, TAL, and the others are going to have to become “nonprofit organizations”? That doesn’t sound very promising for their, er, profits going forward, and it’s a good reason Deutsche, for example, took today as a cue to replace its $20.10 price target on New Oriental stock with a target of $2.50, cut its target for TAL nearly 90%, from $85 to $8.60, and slap a $3 price target on Gaotu Techedu — which Deutsche had previously valued at $97!

That being said, the worst has now happened, and the bad news is now baked into these companies’ stock prices. It would appear that what we’re seeing today is short-sellers closing their short positions and counting their winnings. This trading action is driving share prices higher in the short term, but beware: It could be a dead cat bounce.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/07/27/why-chinese-education-stocks-bounced-back-today/

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