Why New Oriental Education Shares Popped

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 New Oriental Education  (NYSE: EDU  ) jumped as much as 13% at market open before giving back most of the gains, as the Chinese test-prep and language service received an upgrade from Oppenheimer and an important stamp of approval from the Securities and Exchange Commission.

So what: Among the moves the SEC approved was the consolidation of New Oriental China, in which it holds a minority ownership stake, into its financial statements. The government agency also allowed similar consolidations of schools and wholly owned Chinese subsidiaries. Oppenheimer analyst Ella Ji upgraded the stock to outperform on the news and after a channel check revealed that operations have been strong over the past three months.

Now what: Shares of New Oriental fell off a cliff when short-selling crusader Muddy Waters, which has called out a group of Chinese chop shops, issued a "strong sell" rating on the stock and accused it of fraud. The SEC's announcement over the weekend essentially refutes those accusations and should give investors a sense of security.

Notably, the stock was up a little more than 4% on the day despite losing more than half its value when SEC began its investigation and Muddy Waters made that accusation. I'm wary of Chinese companies for a number of reasons, and even the perception of foul play is often enough to put a stock on ice for a long time. I'm content to stay on the sidelines for this one.

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