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New Oriental Education Called Into The Principal's Office

No one in their right mind would take the risk playing 1 in 6 odds with their lives. Do you seriously want your money to take a risk of 1 in 8? (Read my thoughts about investing in Chinese companies traded on U.S. exchanges in Chinese Stocks Are Still in Danger of Blowing Up.)

With that said, here is what the company did report for the quarter just ended.

The top and bottom lines improved with an increase in some margins. Wall Street was expecting earnings per share of 12 cents and the company beat that by 3 cents. Per-share 15 cents is a significant improvement over the same period results last year of 9 cents a share.

Reported revenue continues to grow aggressively. The mean estimate for revenue was $188 million and actual revenue reported was $193.3 million, for a $5 million beat. Gross margins improved from 58.7% in the prior year to 59.5% in the reported quarter.

New Oriental Education's CEO Michael Yu stated:

"We are pleased to see strong revenue growth of 40.7% in the fourth fiscal quarter. We sustained a healthy top line growth trend in the full fiscal year 2012 with revenues of about US$771.7 million, up more than 38%, and student enrollments of over 2.4 million, up about 15%. Our student enrollment growth in the fourth fiscal quarter was 7.7%, below the average for the full fiscal year. The slower growth in student enrollment in the fourth fiscal quarter was primarily due to the early timing of Chinese New Year in 2012. Many students enrolled in New Oriental's Spring tutoring classes in February of the third fiscal quarter rather than in early March of the fourth fiscal quarter. As a result, we experienced strong enrollment growth of 21.6% in the third fiscal quarter and slower enrollment growth of 7.7% in the fourth fiscal quarter."

Based on my experience with any reasonable type of investigations of Chinese companies, the stocks have an extraordinarily difficult time recovering. If the company can get on top of this and satisfy the SEC quickly, the damage may be repairable.

Considering the company doesn't even know what the investigation is about, a quick and favorable resolution appears to be challenge at best.

Bargain hunters and short-sellers covering positions could push the price up in relation to the gap down price this week. Looking at the chart, I expect short-term resistance near $8 and again at $20. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $15 a share.

BPI ChartBPI data by YCharts

If you are anticipating Tuesday's drop in price to signal a buying opportunity, you may find the end of the day Wednesday or opening on Thursday better than Tuesday. There is no hurry jumping on board with New Oriental Education. Stocks dumping as a result of news like this can continue to fall for a long time. Take your time and do your homework before allocating capital here. Look for a second break above $20 as the one that "sticks." You may have a long wait before New Oriental trades above $20, however.

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