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Why Chinese Education Stocks Bounced Back Today

By Rich Smith – Sep 1, 2021 at 11:30AM

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Morgan Stanley gave the all-clear to investors to begin bargain hunting in China's hard-hit education sector.

What happened

In mid-morning trading Wednesday, shares of New Oriental Education (EDU 6.24%) are rising 8.2%, while 17 Education & Technology Group (YQ 15.39%) has gained 13.6%, and Gaotu Techedu (GOTU 11.11%) is up a startling 15.6%.

Does this mean that Chinese education stocks are popular again?

Schoolkids scribbling in notebooks.

Image source: Getty Images.

So what

Sorta, kinda -- but perhaps not quite yet.

You see, the Chinese government has had an axe to grind with its for-profit education companies these past few months, blaming them for raising the cost of raising a child by making paid-for after-school tutoring essential among parents who want a bright future for their kids. China's worry: This might dissuade Chinese parents from having more than one child, and thus derail the government's plan to roll back its own "one-child" policy in time to avoid a demographic catastrophe.

New regulations enacted to curb the popularity of for-profit education have had a devastating effect on the education stocks, with both New Oriental and 17 Education shares losing 78% of their value each over the past three months, and Gaotu Techedu falling 82%.

EDU Total Return Price Chart

EDU Total Return Price data by YCharts.

Now what

But now, with these education stocks down so much, some investors are feeling tempted to try to take a grab at these falling knives.

Such brave souls got a vote of confidence in their strategy this week, by the way, when investment bank Morgan Stanley stepped forward and declared that -- in its opinion at least -- sector leader New Oriental Education is selling for barely 60% of what it's worth, and has the potential to rise as much as 60% in value over the course of the next year.

Well and good. Morgan Stanley wants to go bottom-fishing, too, and it seems a lot of investors are happy to have the company. If you count yourself among these happy anglers, I wish you luck -- but there is one thing you should be aware of.

Despite giving its vote of confidence (and its overweight rating) to New Oriental on Monday, Morgan Stanley cautioned that the stock is likely to lose money at least through 2023 as it restructures its business to abide by China's new regulations, and earn money in those few markets that remain open to it. In other words, while it's possible that New Oriental stock (and the other stocks) will eventually earn you a profit, it's almost certain that you'll need to exercise patience in waiting for that profit to materialize.

Caveat investor.

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

Stocks Mentioned

New Oriental Education & Technology Group Stock Quote
New Oriental Education & Technology Group
EDU
$30.13 (6.24%) $1.77
Morgan Stanley Stock Quote
Morgan Stanley
MS
$92.10 (-0.97%) $0.90
Gaotu Techedu Stock Quote
Gaotu Techedu
GOTU
$1.40 (11.11%) $0.14
17 Education & Technology Group Inc. Stock Quote
17 Education & Technology Group Inc.
YQ
$1.35 (15.39%) $0.18

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

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