Why New Oriental's Shares Got Crushed
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Chinese education-services provider New Oriental Education (NYS: EDU) were sent to detention by investors today, causing the stock to fall as much as 38% in intraday trading after the company revealed that it's being investigated by the U.S. Securities and Exchange Commission.
So what: The timing of announcing the SEC investigation was a bummer for New Oriental, because otherwise investors would probably be celebrating the fact that the company delivered second-quarter earnings that beat estimates on the top and bottom line. But it wasn't to be.
The actual disclosure from New Oriental doesn't sound particularly sinister. The company said the SEC alerted it on July 13 that it is investigating. On the nature of the investigation, New Oriental said:
The Company believes that the investigation concerns whether there is a sufficient basis for the consolidation of Beijing New Oriental Education & Technology (Group) Co., Ltd., a variable interest entity of the Company, and its wholly owned subsidiaries, into the Company's consolidated financial statements.
Whether that's the true nature and scope of the investigation and what the outcome will be is still unclear. However, the sharp reaction from investors isn't all that surprising, given the high level of fraud that we've seen from China-based companies listed on U.S. exchanges. Clearly, investors now have a hair trigger when it comes to the least hint of legal problems.
Now what: It's really hard to say what's next for New Oriental, because we'll have to wait and see what comes out of the SEC's investigation. Investors will want to keep a close eye on new developments, while those who have been waiting on the sidelines or had been thinking about increasing their position may want to do a deep dive into the company. If -- and that's a big if -- the investigation is relatively benign, then today's huge drop could be a buying opportunity.
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