Is China Flunking Out Because of New Oriental?


New Oriental Education & Technology (NYS: EDU) has carved a cozy living out of preparing children of China's well-to-do parents for critical tests, but today it's the educator that's getting schooled.

The country's leading private educator saw its stock fall by as much as a third after revealing that the SEC is looking into the validity of the company's past financial statements.

The sticking point appears to be the way that New Oriental has been accounting for its variable interest entity, Beijing New Oriental Education & Technology.

We still don't know if the company is guilty -- or the extent of the faulty accounting if it did in fact mess up -- but you know how gun-shy stateside investors have become when suspicions and accusations arise of Chinese equities.

Short first, ask questions later.

The reaction is still a bit of a surprise. New Oriental isn't a recent debutante or some obscure company. It's a category leader. It has been trading on the New York Stock Exchange since 2006. This obviously isn't enough to vindicate the company, but it should be enough to grant it the benefit of the doubt.

Making matters worse, many of China's popular growth stocks are also taking a hit today.

  • Search engine leader Baidu (NAS: BIDU) was trading 3% lower this afternoon.

  • SINA (NAS: SINA) , the popular online portal behind the Twitter-like SINA Weibo, is taking an even harder 7% hit.

  • China's leading video-sharing website operator -- Youku (NYS: YOKU) -- is trading 8% lower.

  • Renren (NYS: RENN) , the company behind country's top social networking website, is suffering a 5% decline.

Sympathy plays make sense when bad news for one particular company can be translated into weakness for its sector. However, how does a single SEC investigation -- one that won't be resolved right away -- at New Oriental have to do with the fundamentals elsewhere?

I'd shake my head, but overreactions also spell opportunities for nimble investors looking for attractive entry points into dynamic growth stocks.

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