Stocks to sell

A Reverse Split Doesn’t Mask New Oriental Education’s Problems

  • New Oriental Education (EDU) stock might look like it’s taking a moonshot.
  • However, the reality is actually bleak for the company and the stock.
  • Investors should stay on the sidelines when it comes to New Oriental Education.

Private Chinese education specialist New Oriental Education (NYSE:EDU) might have been worth investing in many years ago. However, EDU stock is a toxic asset in the 2020s for a variety of reasons, and I give it an “F” in my Portfolio Grader.

As we’ll see, the technical picture is quite bearish. The share price might look like it’s moving higher, but looks can be deceiving sometimes.

Second, EDU stock is simply a wrong-time, wrong-place type of investment. Beijing clearly isn’t making it easy — or even possible — for a business like New Oriental Education to thrive.

In addition, New Oriental Education’s fundamentals simply don’t support a bullish thesis for prospective investors. All in all, you’ll surely find that there are much better places to park your investable capital now.

EDU New Oriental Education $10.93

What’s Happening with EDU Stock?

Recently, EDU stock has been trading above $10. This might surprise you if you’re accustomed to seeing the stock trade at much lower price points.

What exactly is going on? Thankfully, InvestorPlace contributor Cristian Docan had the scoop, and investors will need to know the details.

EDU stock moved up 850% in a single day, but don’t get the wrong idea here. The reason for this move isn’t particularly bullish, and might even be considered bearish.

As it turned out, New Oriental Education’s American Depositary Shares (ADS) underwent a one-for-10 reverse split. Therefore, 10 previous shares would be combined into one new share — hence, the massive price increase.

Why would New Oriental Education do this? It’s not uncommon for a company to resort to reverse share splits when the stock price has declined sharply.

For New Oriental Education, the reverse split might be considered a Hail Mary pass for a business that’s not doing well. As Docan put it, New Oriental Education “lost 43% of its market capitalization and the bearish sentiment is unlikely to stop.”

The fact is, EDU stock has been in a terrible state of decline since February of last year. While some companies were rapidly recovering from the impact of Covid-19, New Oriental Education’s problems would only mount over the ensuing months.

The Big Ban

Even beyond the technical aspects, it’s difficult to defend an investment in New Oriental Education.

To be frank, Beijing hasn’t created a favorable environment for some of China’s businesses. This includes the privatized education sector in which New Oriental Education operates (or tries to operate).

In November of last year, New Oriental Education had to make a difficult announcement. As a response to regulations, the company revealed its “plans to cease offering tutoring services related to academic subjects to students from kindergarten through grade nine… at all learning centers across China by the end of 2021.”

Docan observed that this these services accounted for approximately 50% of New Oriental Education’s total revenue. Furthermore, it’s difficult to predict how much longer China’s crackdown will persist.

According to the Off-Campus Education and Training Department of China’s Ministry of Education, the number of companies providing offline tutoring services fell to 9,728 by the end of February 2022. That’s significantly lower than the 124,000 counted prior to the crackdown.

It might not be too shocking, then, that New Oriental Education’s financial picture is subpar. On a trailing 12-month basis, the company has a net loss of $770 million. That’s a deep financial hole to dig out of, and New Oriental Education is not in a good position to improve its situation.

What You Can Do Now

A tough regulatory environment is making it difficult for New Oriental Education to turn a profit. Meanwhile, EDU’s apparent moonshot is just the result of a reverse share split.

Beijing is sending a message that is loud and clear. That message is: New Oriental Education is not a business that you can invest in with confidence.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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