Why Chinese education stocks rebounded today

What happened

“Buy the rumor, sell the news,” the old investment maxim goes, advising investors to buy stocks before giving the expected good news, and then cash in when the news is released. But … what do you do when the expected news is Wrong instead of good?

Well, it seems the answer today is to sell on the rumor of impending disaster, then buy back when the rumor turns out to be true – and this is how investors are reacting to the confirmation of the crackdown on China against for-profit education companies because the actions of

• Gaotu Techedu (NYSE: GOTU) increased by 4.6%;
• New oriental education(NYSE: EDU) jumped 5.5%;
• NLP Education (NYSE: TAL) increased by 6%;
• and 17 Education and Technology Group (NASDAQ: YQ) topped them all, exploding 22.1% higher.

So what

This may not be the reaction you’d expect to today’s news from Wall Street, where investment bank Daiwa downgraded New Oriental Education and TAL Education stocks to investors. “hold” today and Deutsche Bank has done the same for New Oriental, TAL and Gaotu Techedu. .

As Deutsche explains in a note covered by TheFly.com, the Chinese State Council has just released its “Opinions on Further Relief from Homework Burden and After-School Support for Education Students mandatory ”, and the news is actually even worse than feared. . Extracurricular tutoring institutions such as Gaotu, New Oriental, TAL and 17 Education must now transform into “non-profit organizations”, with the aim of reducing the cost of education for students and their parents (and, incidentally, , to facilitate the to consider having more children, thus reconstituting the decrease of the Chinese population).

Now what

New Oriental Education, TAL and the rest are going to have to become “non-profit organizations”? That doesn’t look very promising for their, uh, future profits, and that’s a good reason why Deutsche, for example, took today as a signal to replace its price target of $ 20.10 on the dollar. New Oriental stock by a target of $ 2.50, reduced its target. for TAL nearly 90%, from $ 85 to $ 8.60, and set a price target of $ 3 on Gaotu Techedu – which Deutsche had previously valued at $ 97!

That being said, the worst has now come and the bad news is now embedded in the stock prices of these companies. It would appear that what we are seeing today are short sellers closing their short positions and counting their earnings. This trade action is pushing up stock prices in the short term, but beware: it could be a dead cat rebound.