This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

New Oriental Education Called Into The Principal's Office

NEW YORK ( TheStreet) -- Alarming news from New Oriental Education (EDU - Get Report) is driving American for-profit stocks Bridgepoint Education (BPI), Apollo Group (APOL), Corinthian Colleges (COCO) and Devry (DV) lower.

If you're a current New Oriental Education investor, Tuesday's earnings must have you scratching your head.

New Oriental Education reported impressive beats on the top and bottom lines. Unfortunately, shares gapped lower and not higher. New Oriental Education is a Chinese company, but investors are liquidating the entire space. (See my recent article Will Bridgepoint Be Held Back a Year? )

BPI Chart BPI data by YCharts

New Oriental Education has lost about 30% of its market cap from Monday's close. New Oriental Education disclosed on its website they are the target of an active SEC investigation.

According to the website:

"On July 13, 2012, the Company was informed that the U.S. Securities and Exchange Commission (the "SEC") had issued a formal order of investigation captioned 'In the Matter of New Oriental Education & Technology Group Inc.' The Company believes that the investigation concerns whether there is a sufficient basis for the consolidation of Beijing New Oriental Education & Technology (Group) Co., Ltd., a variable interest entity of the Company, and its wholly-owned subsidiaries, into the Company's consolidated financial statements. The Company intends to fully cooperate with the SEC in its investigation."

Only two sentences in an earnings report that is otherwise glowing with positive results. No one wants to read "SEC investigation" about their stock, especially one based in China.

New Oriental Education may not know the full details of the investigation, but there is one thing we do know. The SEC is suing auditors for not providing audit documents. TheStreet's Timothy Collins recently called EDU a short candidate. If you read Collins' article you would have known about EDU before the fall . (You need a Real Money Pro account to read, but Collins' analysis makes it worthwhile.)

New Oriental Education used Shanghai Deloitte as the auditor for the 2011 annual report. Shanghai Deloitte was sued by the SEC about two months ago for failing to submit requested documents to the SEC. Deloitte argues it is caught between two separate and conflicting sets of laws. Deloitte, in its defense, has claimed it is not legally allowed to hand over certain documents because of state secrets laws in China.

The bottom line is, investing in Chinese stocks adds another layer of risk for investors. The risk is further compounded by the current inability of the SEC to impose sanctions against Chinese nationals for securities fraud. U.S.-listed and -traded Chinese stocks are a perfect storm for securities fraud. There is nearly zero risk for a potential perpetrator and a life time of riches for a successful fraud.

I have written about the risks facing investors for about a year now. With so many opportunities available in the North America and Europe, there is no reason to play Russian roulette with your portfolio. In Russian roulette, players use a six-shooter, effectively giving odds of failure at 1 in 6. Based on my experience, the odds of failure with a Chinese company listed in the U.S. the odds of failure are about 1 in 8.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
EDU $20.23 0.60%
AAPL $110.37 -1.75%
FB $88.15 -1.94%
GOOG $606.25 -1.32%
TSLA $245.57 -0.86%

Markets

Chart of I:DJI
DOW 16,374.76 +23.38 0.14%
S&P 500 1,951.13 +2.27 0.12%
NASDAQ 4,733.4970 -16.4820 -0.35%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs