What happened

Shares of TAL Education Group (NYSE:TAL) fell 13% in July, according to data from S&P Global Market Intelligence, as the K-12 Chinese tutoring service posted a disappointing first-quarter earnings report and was attacked by short-seller Carson Block, who accused the company of committing fraud.

As this chart shows, the stock took a sharp dive toward the end of the month as the two pieces of news came out one after the other:

TAL Chart

TAL data by YCharts

So what

Shares of TAL Education Group fell 12% on July 26, after the company's earnings report came out. The Chinese tutoring service reported another round of strong growth, with revenue up 71.1% to $550.6 million, as student enrollment was up 88.7%. That led to a 160% increase in operating income and a 132% jump in net income to $66.8 million. 

A group of Chinese kids writing in notebooks.

Image source: Getty Images.

Adjusted earnings per American depositary share doubled form $0.07 a year ago to $0.14, compared with estimates of $0.08. However, the stock seemed to fall because investors were disappointed with second-quarter revenue guidance, which was worse than expectations, as management called for sales growth to slow all the way to 42%-45%, or 40%-43% adjusting for currency exchange rates. That forecast was below estimates of 47.4% growth. 

Two days later, the stock fell again as Block accused the company of committing fraud. In an interview on Bloomberg, Block, the noted short-seller who heads the research firm Muddy Waters, accused of the company of making sophisticated asset transactions that have inflated profits and pointed to management's excuse-making about slowing revenue as evidence of the fraud.

Now what

Chinese companies like TAL have been vulnerable to such attacks in the past. Block shorted Sino-Forest after accusing it of fraud of 2011, and it was later delisted.  Moreover, Reuters reported that Chinese educator New Oriental Education committed fraud in 2016.

TAL shares had been on a fire before Block's accusation, climbing as much as 2,000% over the past five years, but the recent pressure on the stock is likely to remain, especially with fraud allegations hanging over it and revenue growth suddenly slowing.

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