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Why Chinese Education Stocks Bounced Back Tuesday

By Rich Smith - May 25, 2021 at 12:37PM

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Goldman Sachs' bad news for Chinese education stocks is good news for investors.

What happened

Bad news was good news for Chinese education stocks Tuesday morning as shares of China Online Education Group (COE -1.91%) climbed 9.1% through 10:40 a.m. EDT, TAL Education Group (TAL 0.91%) gained 10.3%, and New Oriental Education (EDU 0.08%) rose 14.8%.

As 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?

Man in suit holds up 100 yuan note in front of face with $100 bills in the background

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.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends New Oriental Education & Technology Group and TAL Education Group. The Motley Fool has a disclosure policy.

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Stocks Mentioned

New Oriental Education & Technology Group Inc. Stock Quote
New Oriental Education & Technology Group Inc.
$24.55 (0.08%) $0.02
TAL Education Group Stock Quote
TAL Education Group
$4.45 (0.91%) $0.04
China Online Education Group Stock Quote
China Online Education Group
$1.54 (-1.91%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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