China highly values education, to the point where much of society is formed around academic achievement. Cynically, then, this dynamic represents a powerful backdrop for New Oriental Education (NYSE:EDU), a provider of private educational services in China. Thus, divorced from any other context, EDU stock should be a resounding buy. However, the Chinese government has some thoughts on the matter.
Last year, Beijing imposed a sudden and startling crackdown on after-school education companies, sending the entire industry into disarray. On the surface, the move doesn’t appear to make much sense. Given the country’s stated efforts to expand Chinese influence, educating its massive population would seem the most logical approach.
However, as CNBC reported, prior to the crackdown, “tens of millions of students across China drown in after-school tutoring courses every year.” To ease the burden and anxieties on Chinese families, however, policymakers have forced academic tutoring businesses to restructure as non-profits. Not surprisingly, then, EDU stock and its ilk plummeted.
In the year-to-date through the close of the April 27 session, EDU stock evaporated nearly 49% of market value. However, on the aforementioned session, shares spiked up almost 11%. Recently, New Oriental Education stated that its business overhaul is almost complete. Moreover, the implication is that the company’s new investments into nonacademic tutoring and intelligent learning devices will eventually turn profitable.
But is that enough for investors to take a shot on EDU stock? On a contrarian level, that the underlying company is still down nearly half relative to January’s opener is enticing. In addition, if Beijing is to meet the aspirational targets of its 2050 initiative, improving educational standards must take priority. Here, overhanded governmental control may prove ineffective, thus it’s possible that China could reverse course.
At the same time, the country is known for its extreme policies, most recently with its zero-tolerance approach to the coronavirus pandemic. Seeing as how China appears rather erratic with its economic and societal strategies, risk-averse investors may want to wait a bit on the sidelines. Even if you’re a speculator, EDU stock will not be an easy ride.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.