What happened
Bad news was good news for Chinese education stocks Tuesday morning as shares of China Online Education Group (COE +4.79%) climbed 9.1% through 10:40 a.m. EDT, TAL Education Group (TAL 2.72%) gained 10.3%, and New Oriental Education (EDU 4.88%) rose 14.8%.
As TheFly.com reported today, investment bank Goldman Sachs cut its price target on TAL Education and downgraded New Oriental Education stock, but the stock prices rose anyway. Why?
Image source: Getty Images.
So what
Goldman Sachs probably thought it was delivering investors a warning about the perils of investing in heavily regulated international stocks that can be devastated by restrictions imposed by the Chinese government -- but that's not the way investors seem to be taking the news.
On the one hand, TheFly reports that "stricter regulatory requirements on learning center approval and lower after-school tutoring penetration growth" have Goldman thinking TAL stock is worth only $53 today (down from $80 previously). The analyst warned, too, that regulation could slow down New Oriental's growth rate to just 11% annualized and cut the stock's value to just $14.40 per share -- down from $20.10 previously.
Now what
On the other hand, TAL Education stock costs less than $40 today, and New Oriental just $10 and change. And this means that even after Goldman cut its price targets, the banker still sees Tal Education stock rising 33% over the next year, and New Oriental stock going up 38%.
Despite the negative tone of today's notes, and despite all the risks of government action curtailing these businesses, Goldman Sachs continues to attach "buy" ratings to both stocks -- and that's the fact that investors are focusing on today.
It's why TAL, New Oriental, and -- by extension -- China Online Education Group are going up.
