What happened
Worries over China's crackdown on for-profit education companies have cost their shareholders dearly. Over the past month:
- GSX Techedu (GOTU 8.69%) -- also known as Gaotu Techedu -- has fallen 41.5%;
- New Oriental Education (EDU 2.77%) is down 42.7%; and
- TAL Education (TAL 0.26%) has lost 50%.
And yet, on no obvious news, on Wednesday, shares of these Chinese education stocks began to bounce back. As of 10:45 a.m. EDT, TAL stock was up 6.7%, New Oriental was up 8.6%, and GSX Techedu had popped by 11.2%. The question is: Why?
Image source: Getty Images.
So what
The answer may be as simple as: Valuation.
While none of these companies looks obviously "cheap," after their sell-offs, TAL Education costs barely 4 times trailing sales, New Oriental sells for 3.6 times trailing sales, and GSX seems like an even better bargain at only 3 times sales. Based on the price-to-sales ratios, some analysts believe these stocks are now on sale.
Last week, for example, Goldman Sachs downgraded GSX Techedu stock, but set a $20 price target on the shares regardless -- implying there's 25% upside in the stock even after Wednesday morning's rally. Similarly, the analyst set a $14.20 price target on New Oriental stock (implying a 55% upside), and said that TAL stock should hit $53 a share in the next 12 months. With TAL shares changing hands at around $29.60, that means the analyst thinks the stock could go up by as much as 79%!
Now what
At least, that's what Goldman Sachs thinks will happen over the next year. On Wednesday morning, investors appeared to be bottom-fishing in response to the optimistic outlook. And yet, danger still lurks in these waters.
As Al-Jazeera recently reported, the situation around the for-profit education sector in China remains fluid, and most of the developments so far have been of the "bad news" variety, with the government capping the rates that some companies can charge for tutoring services, fining others for "false advertising," and threatening to ban still others from marketing tutoring services for kids under 7, while requiring that teachers employed by these schools be licensed to teach.
In total, Bloomberg Intelligence recently warned that these measures "could decimate revenue throughout the industry." If that's the case, investors will want to be prepared: Those low trailing price-to-sales valuations may not look so enticing once the sales go away.
