Why New Oriental Education Stock Caught Fire Today

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What happened

Shares of New Oriental Education (NYSE:EDU) traded sharply higher today, gaining as much as 13%. As of 3:13 p.m. EDT, the stock was up 10.2%.

The private education stock got a boost from China’s decision to back skills-based education and push vocational training.

So what

In a press release that dropped late yesterday, the Chinese government laid out a strategy to promote vocational education among its population. Specifically, regulators are dictating that college-level vocational education classes will represent 10% of undergraduate enrollment by 2025. The government also said that by 2035, its vocational education system “will be among the best in the world.”

Image source: Getty Images.

This is good news for New Oriental Education, which has been pummeled in recent months. The stock was hitting all-time highs earlier this year, before the Chinese government introduced strict regulations to rein in the for-profit private tutoring industry. The rules were much more stringent than originally anticipated, banning many tutoring ventures, while also instituting a moratorium on tutoring during vacations and holidays. 

Since tutoring represented the majority of New Oriental Education’s revenue, the move has weighed heavily on the consumer discretionary company. As of market close yesterday, New Oriental Education’s stock had lost nearly 90% of its value since February.

Now what

Citigroup analyst Mark Li believes this represents a lifeline for the beleaguered company. The government crackdown has driven a number of companies out of business, and resulted in industrywide layoffs in China. 

Though the government has thrown private education companies in China a bone, the market for tutoring has gotten much smaller in recent months. Invest in the sector at your own peril.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.