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Why GSX Techedu Stock Slumped Today

By Jon Quast – Updated Aug 10, 2020 at 11:51AM

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Investors didn't seem to care when the company was called a fraud. But a downgrade with 20% upside sent shares falling.

What happened

Shares of Chinese online-education company GSX Techedu (GOTU 0.00%) were falling on Monday after an analyst downgraded the stock. As of 11:30 a.m. EDT, the stock was down 10% for the session.

So what

It's surprising to see GSX Techedu stock fall on this analyst downgrade. It's hardly the first time the company's upside has been questioned. Back in May, research firm Muddy Waters announced it was short GSX Techedu stock, believing the company to be a fraud. Later, a research firm named Grizzly Research published a report in agreement with Muddy Waters. 

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Image source: Getty Images.

However, neither of these research firms brought GSX Techedu stock down. To the contrary, since Muddy Waters announced its short position, the stock has rallied around 200%.

Now what

Here's what makes today's news particularly ironic. According to TheFly, Citi analyst Mark Li previously called GSX Techedu stock a buy, but has now changed to sell. However, his sell recommendation comes with a price target of $115 per share -- approximately 20% higher than where the stock trades right now.

This is why investors must take analysts' opinions with a grain of salt. They're helpful to read and to understand where an opinion is coming from. But they aren't good indicators for which direction a stock will trade in the short term. If Li sent the stock lower with his sell recommendation that comes with 20% upside, GSX Techedu stock should have been decimated by allegations of fraud. 

Business results are a much better indicator of stock performance over the long haul. With GSX Techedu, it would be nice to know how its business performed in the second quarter of 2020. However, the company has yet to schedule a date to report results. Its first-quarter update came on May 6. Therefore, one would expect results for the second quarter about now.

GSX Techedu's ongoing silence regarding Q2 results doesn't necessarily mean there's a problem for this international stock, but it's definitely worth watching. Given the fraud allegations to this point, it's important to see timely quarterly results if investor confidence is to be maintained. 

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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